What happened

Really, Ammo (NASDAQ:POWW)? Back to back promises of triple-digit sales growth? What exactly are you planning for an encore?

Thursday morning, management at the penny stock turned momentum stock answered that question when they announced a stock buyback to try to keep the momentum going. However, the plan backfired: As of 1:47 p.m. EST, Ammo stock was down by 7.1%.

Cartoon characters confused by stock chart arrow falling and crashing into floor

Image source: Getty Images.

So what

On Thursday, Ammo announced that its board of directors had authorized the repurchase of 1 million of its shares from Jagemann Stamping Company. I don't imagine that Jagemann is happy about this though, as Ammo is exercising a "contract right" to buy back the shares at only $1.50 each, making for a total repurchase amount of $1.5 million.  

After its recent run-up, Ammo shares sell for more than $6.60 each on the open market, meaning the shares being bought back are actually worth closer to $6.6 million.

Now what

For Ammo shareholders not named "Jagemann," this can only be viewed as good news. Ammo is rolling back its stock dilution a bit, and doing so at a very good price. That still doesn't make the stock a buy in my opinion, though. Unprofitable and cash flow negative, Ammo has had to issue a staggering number of shares to keep itself solvent over the past few years. In fact, it has more than doubled its outstanding share count since early 2017.

Unless the company succeeds in turning its explosive sales growth into profitable growth soon, I'd expect Ammo will need to turn right back around and issue more shares to keep itself in business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.