Israel - Pinksheets

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Red-faced on the pink sheets

16.4.06 | 12:36 By Aloni Madar

Israel's capital market has been booming for four years, attracting not a few businessmen to the stock market. The easy way to obtain ownership of a publicly traded company was to pick up one of the stock market shells, the bombed-out remnants of failed enterprises that are still listed for trade, albeit in some dark corner of the market such as the "preservation list" of the Tel Aviv Stock Exchange or the pink sheets on Nasdaq.

Generally the buyer would pour some sort of operations into the shell. In other cases, the mere fact that the shell was bought sufficed to lift its share price, as speculators assumed the shell had been bought for a purpose, albeit not a known one at that stage. Anyway, that gamble has worked out pretty well for some players.

At the start of 2004, Star Night returned from oblivion to the TASE. It had been ousted (then named Orlil) because of offenses by itself and its management.

The company changed hands and the new owners changed its name to Star Night. It was reinstated to the preservation list, which is equivalent to the pink sheets.

On the change in ownership, the company's shares rose from being worth 1 agora per share to 15 to 30, reflecting a market valuation of NIS 2.5 million.

But Star Night's new owners promptly began to drum up headlines and the share price reacted. The first round of reports raised the share price to 120 agorot, then to 250 (NIS 2.50). The company continued to bombard the market with announcements of deals and expectations, and also reported its first profit in years. Investors applauded and in the first half of 2004, the share price reached NIS 5.00.

It soon collapsed back to NIS 2.50, then took off again, rising to a high of NIS 10 per share at the start of 2005. Yet throughout this, the stock had been stuck in the preservation list. At present the share price is around NIS 6.50, reflecting a market valuation of NIS 70 million.

Theoretically, anybody investing say NIS 5,000 in Star Night at 15-30 agorot per share and holding on until the stock was trading at NIS 10, now had NIS 250,000. But there were other investors in Star Night, mainly institutional investors, which got in at NIS 9 to NIS 10 per share and are down 50% of their investment.

Star Night is far from being the only stock on the preservation list that has generated phenomenal returns for investors, if their timing was right. These are all companies that changed hands and whose new owners brought in some activity that fired the market's imagination. Even rumors of takeovers and operations can turn a minnow into an overnight whale.

Gambit Computers turned into Boymelgreen Capital. Kish turned into Lito Group. Time Squared turned into Data GCI. All were shells turned into real companies.

Riding the pink sheets is done in the U.S. too, though it isn't for the weak of nerves. An investor can double his money or lose the lot in the blink of an eye. Usually the investors in these stocks have no idea what the companies do or are worth. It is truly the wild west of the stock market. In some cases they can't even know how many shares have been floated because the companies simply ignore their shareholders, not even revealing where its headquarters is.

In one case of a company purporting to be a hi-tech firm, the chief executive told shareholders that after his father's death, he needed their help: they would be diluted in favor of another stock allocation, to himself, to help him overcome his grief.

In another case, the company's official phone number is the chief executive's cellphone. That company hasn't released a financial statement in four years, which hasn't stopped investors from sending its stock climbing 10 times in two months. The CEO says the report is almost ready.

Sometimes an investor in a pink-sheets type company thinks it makes data security systems, only to discover months down the line that it's changed its name and ticker symbol, and now makes fertilizers for strawberry farmers. Two months later it's an empty shell seeking a reverse merger.

These are things that happen in the pink sheets, where shares may cost a few cents, no more. But if you thought a share price couldn't go below $0.01, you're wrong. It can. It could also soar to $10, if you're lucky, if the company released some amorphic announcement cleverly packaged by some PR genius. Usually it turns out the gains were devoid of substance and the share price subsides again.

Pink sheets companies often claim to be on the verge of a breakthrough, in medicine or technology or water purification, you name it. If 1% of their claims were true, we'd be living in a world that would make science fiction look sick, a world in which the Terminator could become the governor of California. But make no mistake, making a killing on the pink sheets is a very, very unlikely prospect.

http://www.haaretz.com/hasen/pages/ArticleContent.jhtml?itemNo=706276

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