A precipitous drop in share price of some of the stocks that I have, and will continue to recommend, on PeakStocks.com is not uncommon.

In fact, on my Investing Style page, I outline the risk factors that come with investing in these types of stocks, and the fact that you have to be prepared to lose 50% of your investment in rapid fire succession.

Most of these names are usually thinly traded, have small market caps, and can be influenced through various events, most of which have nothing at all to do with the actual company and its operations or financial condition.

The same can be said of the latest share price decline in uWink (Nasdaq: UWKI.OB).

uWink is an entertainment and hospitality software development company that develops casual, interactive, social games, in addition to licensing the rights to those games and their proprietary touch-screen ordering and gaming interface to restaurants, entertainment venues and the hospitality industry.

uWink also owns and operates several restaurants under the uWink brand name that utilize this technology.

The stock has plummeted from about $1.40 to about $.80 as of Friday, with no apparent news, or rhyme or reason to the price fluctuation.

So what’s going on with uWink’s stock?

Large Block Holder Dumping Shares: The most obvious reason for the decline of uWink’s stock price is that someone just wants to get rid of the their shares.

It’s a simple enough proposition, but one that tends to illicit panic in the streets: Wall Street, and your street.

Because uWink’s stock trades with such low volumes and over the counter on the pink sheets, it is subject to the whims of large holders of the stock on the upside and the downside.

The average volume of uWink is about 12,000 shares per day.

As the decline began and accelerated, volume has ticked up to 21,000 shares on June 27th, 45,760 on June 30th, 7,420 on July 1st, and 88,750 on July 2nd. I didn’t include last Thursday the 3rd as it was a half trading day but even if we did, volume was 10,380 on a half day of trading.

With a stock like this, it isn’t hard to see that a large block of shares being traded in any one day or one week trading period will have a severe impact on the share price one way or another.

If you look around the market these days, it isn’t hard to find faltering stocks, and stocks with much higher volumes (in fact many on my watch list!) that have fallen in price severely in a very short amount of time.

As things continue to spiral out of control and a stock declines in value, you get more and more selling as people bail without knowing why everyone else is bailing.

This feeds on itself.

If stockholders of uWink think that someone knows something they don’t, they are certainly not going to ask questions first and then sell, they are going to sell now and ask questions later.

This is most likely what has been happening to this point with uWink.

• Recent Opening Problematic?: Another potential reason for the stock price decline is a perception that uWink’s latest location in Hollywood didn’t turn out so hot, or that there were some issues with the location.

It’s true that as with any newly opened retail or restaurant location, there are always going to be some slight snafus and issues that need to be worked out.

Especially with a highly integrated and technologically advanced restaurant concept like uWink.

Either way, I highly doubt that anyone’s investment thesis would change as a result of a botched order or two, or some malfunctioning gaming terminals.

The long term uWink story remains intact, and I would put this reasoning lower on the list.

• Other Issues: There might also be scuttlebutt within the tight-nit community that trades uWink’s shares that there might be some financial or liquidity issues with the company, or that they might be adversely affected by the deteriorating economy, or other such problem.

Analysts, fund holders and hedge fund managers are notorious for their itchy trigger finger.

If they perceive any problems with the uWink business model or the prospects of that business going forward, it’s always shoot first ask questions later.

Again, with the stock trading with such low volumes, it isn’t hard for someone who owns a large block of shares to dump those shares for any reason, real or imagined, and negatively affect the stock price.

Nothing…

That might be part of the problem.

It’s business as usual at uWink.

They now have two open locations, with a third expected to come on line in about a month or two in Mountain View, CA.

On top of that uWink continues to explore other avenues and deals to license their software to other companies in the hospitality industry, but as of yet, aside from their first deal with a retirement home community, there have been no such announcements.

This is where the uWink business model will shine.

The company is trying to position itself as more of a software company, than a restaurant chain.

In fact, uWink’s CEO, Nolan Bushnell, who also founded Atari Inc. (OTC: ATAR.PK) and Chuck E. Cheese (NYSE: CEC), talked in a recent interview about how uWink’s growth possibilities in this market are huge.

At any rate, as far as the market is concerned, the no-news mantra might be adding a little fuel to the panic fire in that, well, nothing is really happening, and uWink at this point is all talk and no action from a business standpoint, although I would beg to differ.

Finally, as far as concerns about uWink’s liquidity, they should still have about $3.5 million in cash on their balance sheet after their Mountain View location opens, which would give them about $.30 per share in cash on the balance sheet, with no debt.

In addition, uWink has talked about their ability to turn their locations free cash flow positive within 12-18 months.

Thus, with their cash on hand, as well as the visibility of their business model, which allows them to cut costs through their interactive interface for ordering food and garner higher margin game sales through the kiosks, gives them a leg up in those expectations.

uWink should have enough cash on hand and operational cash to fund their ongoing structure for at least 8-12 months before they would need to tap into equity or debt for further financing if they haven’t become cash flow positive before then.

Oh, and these estimates don’t include any potential software or licensing deals, that would allow uWink to improve their bottom line as a result of these deals being very high margin in nature with very low overhead.

Bottom Line

While it can certainly be very disconcerting when shares in a company that you own decline for no apparent reason, you have to be prepared for times like this, and to actually ADD to your position when the fundamental and underlying story remains on track.

Such is the case with uWink.

Even though the economy is in a recession, and uWink is not immune to that, their operational structure and the very fact that they use touch-screen monitors for food ordering and supplement that with free and pay-for-play games, allow them to weather any downturn or tumult much better than other restaurants with notoriously high infrastructure costs.

On top of that, I believe that we aren’t even valuing the company fairly based on all its assets and potential future expansion into the software market.

uWink’s market cap sits at about $10 million as of this writing, which once we include the potential revenue of all 3 restaurant locations for a whole year, would represent about a 1 x sales multiple, again excluding their software and licensing business.

All I can say is be ready to add to your position of uWink in the near future.

I’ll be keeping an eye on the stock and the price action, as well as the business trends and fundamentals, but as far as I can tell from my due diligence and research into the latest happenings, as well as the current stock price decline, the market might be giving us a golden opportunity to pick up some shares on the cheap.

Stay tuned, and be ready to pounce when I send out a buy alert on this one.

*As of 7-4-08. Except share price, all values in millions.