Terry, this article gives a good pro and con on stock promoters. IMO, most of the cautions mentioned apply to most OTC promotions, especially third party. Do you bother to check out the promoters?
Did you just delete a great stock tip?
Most of us should delete e-mail promotions without a second thought. Active investors, though, may find a gem. Here are 5 tips for sorting your inbox.
By Michael Brush
With all the e-mail crowding your inbox these days, the easiest thing to do is hit Delete every time the spam arrives. Especially annoying recently are promotions promising 1,000% returns on stocks you've never heard of.
But is it really wise to whack every single stock idea that hits your computer screen?
The answer is mostly yes, but, sometimes the answer is no. Just consider an e-mail from a few months ago promoting a tiny Houston networking company called eLinear (ELIN, news, msgs). With greater than 70% sales growth, eLinear saw its stock shoot up by 400% over the past year as the company gained admission to the American Stock Exchange. For those seeking new investment ideas, deleting this promotional e-mail from a company called InvestSource would have been a costly move.
The eLinear example underscores a key question: In today's e-mail-happy world, how do you separate legitimate prospects like this from the scores of scams that shakedown artists across the world are pushing on you?
A couple weeks ago, Company Focus reported on the extent to which e-mail stock scams have multiplied. Today, I'm offering five warning signs that serve as legitimate triggers for hitting that Delete key when stock-touting e-mails arrive in your inbox.
The promoters are paid by a large shareholder
Most likely, these shareholders are hoping to create a rally and generate some volume in a thinly traded penny stock so they can dump their position on you. When you see this kind of “third-party payment” revealed in the fine print -- and by law, it has to be disclosed -- hit the Delete button right away.
In early February, a stock-promotion outfit calling itself Daily Double Stock Reporter helped rev up the shares of the tiny digital animation company Cyper Media (CYPM, news, msgs) with a blast of e-mails. The promoters admitted they were paid with 800,000 shares of the company, supplied by a “non-affiliated third party” called JJ Consulting.
We couldn’t track down Daily Double or JJ Consulting to ask if they actually sold in early February, when the promotion campaign sparked interest in the stock. But if they did, they made a profitable move. The stock rose to 18 cents from 13 cents at around the time of the promotion -- but finished the month at 10 cents a share.
Not all e-mail stock promoters can be dismissed out of hand simply because they're paid by the companies they're promoting, whether in stock or cash. Fact is, there are plenty of reputable stock-promotion companies that have solid track records despite getting paid by the companies whose stock they tout. So if you're game to give these guys the benefit of the doubt, there are some more guidelines to follow.
If you must track the advice of newsletter writers with built-in conflicts of interest, stick with promoters who take the high road of accepting only “restricted” shares. That means they can’t sell the stock they're touting for as long as a year or more. Or go with those that have some sort of internal policy that prevents them from selling into any rallies they create. WallStreet Research, for instance, one of the more prominent suppliers of paid research in the micro-cap space, waits two or three days after releasing a report before selling, says Alan Stone, managing director of Alan Stone & Co., a Los Angeles investor relations firm, which owns WallStreet Research.
Jody Janson, a former broker who offers paid stock research from his Investors Stock Daily in Rochester, N.Y, accepts stock as payment. But he does so only with the intention of holding it for the long-term, he says. InvestSource, based in Irvine, Calif., leaves a little more room for potential funny business, with a policy that allows sales of 5% of the 10-day average volume, per day. So far, they have never done so, says the company.
(But I should add that the companies’ Web sites so far don’t state their policies on how they disposing of stock they receive. You may find that you have to call or write the promoter and put the question directly to him.)
And what about those bad guys running the straight out "pump-and-dump" campaigns? Can’t the market cops just lock them up? Oddly, as long as they disclose what they’re up to and play their cards right, they may just stay within the law.
“It is extraordinarily hard to prove fraud for people who do this,” says Bill McLucas, a former director of enforcement for the Securities and Exchange Commission and now a partner in the Washington, D.C., law firm of Wilmer Cutler Pickering. “Disclosure is not an absolute pass,” he says. “But it gets you 90% of the way down the field. The only lever the government has is if the trading itself is manipulative. And most of the people who do this are more sophisticated than that.”
No Web site, no phone number, no response to e-mails
In four words: Head for the hills.
“That’s a big red flag. I mean, these guys could be in the middle of Bangladesh somewhere,” says Janson of Investors Stock Daily. Curiously, you can’t track down many of the stock promoters who disclose that they will sell into any rallies they create. These include outfits going under names like Stock-Market Spotlight, Galaxy Stocks and Daily Double Stock Reporter.
Rest assured that regulators can find them, no matter where they are in the world. After all, the promoters leave tracks, not just on the Internet but also when they buy or sell to reap their profits. “They leave a money trail or the trading trail,” points out John Reed Stark, who has hunted down more than a few overseas scam artists as the chief of the Office of Internet Enforcement in the SEC’s enforcement division.
Sound-alike names
Friedland Capital in New York distributes stock reports under the name of “Herd on the Street,” which, of course, is strikingly similar to the title of the widely read Wall Street Journal stock column called “Heard on the Street.” While this is bound to cause confusion for at least some readers, Jeffrey Friedland of Friedland Capital doesn’t believe it’s a problem. “No, definitely not,” he says. “It is sort of cute. When you open up the page you hear a moo and there is a bull on top.”
Another stock promoter bills itself as the “Investor Financial Times Report,” no doubt a play on name of the well-known European business newspaper, the Financial Times. And in promoting the tiny electronics components maker MB Tech (MBTT, news, msgs) last December, an outfit called “Stock Market Today” managed to work the name of a well-known broker, Merrill Lynch, into the header of the e-mail in capital letters. That may have left the impression with some that Merrill somehow endorsed the tiny stock. (The stock has lost 50% of its value since then to trade recently for 15 cents a share.)
Bottom line: When you see tricks like these, go ahead and hit the Delete button. Or report them to the SEC. The three examples cited are actually within the law. (The Wall Street Journal challenged the use of “Herd on the Street” and lost.) But SEC regulators watch these kinds of tricks closely and nail the bad guys when they can.
Last January, the SEC convicted an Oregon man for using the moniker “AOL Investment Snapshots” in stock-touting campaigns that helped him rack up $1 million in trading profits a few years back. “Anytime somebody is trying to pretend to be someone they are not, it should raise a red flag for the investor,” says Stark. “And it could be a violation of the law.”
Watch for silly or exaggerated claims
Sometimes the mere name is a tip-off. Titles like "Daily Double Stock Reporter," "Winning Stock Alert" or "Homerun Stock Alert" should at least get your defenses up. Others promise spectacular gains and generate a sense of urgency that you have to buy right away. In February, a shareholder of Global Explorations (GXXL, news, msgs) paid for a promotion campaign projecting 3,000% revenue growth and a 400% price increase in the stock.
Some promoters, like Stock-Market Spotlight and Stock Market Today, state straight out that they are providing independent research. But they later disclose in the fine print that they were paid by the company or a large shareholder to produce the report. Call the company getting the coverage if you have doubts about the research. After all, these are small companies interested in building a shareholder base, so someone will find the time to call you back.
Look for a track record
Virtually all of the mainstream stock market newsletters provide some sort of long-term track record, or they submit their picks to a service like Hulbert Financial Digest, which publishes a review their performances. There’s no reason you should expect anything less from paid-for research outfits. “If you can’t get an objective assessment,” says Mark Hulbert of Hulbert Financial Digest, “then the better part of wisdom may be to ignore the advice.”
WallStreet Research, for example, lays out the performance of all its picks at its Web site. (As of Jan. 9, the company says it has returned 60% over the 30 days after distributing a report for a client.) This kind of disclosure should help dispel the natural reluctance you have to trust research that was bought and paid for by a large shareholder, or the company getting the coverage. “I always question the objectivity of any research that is paid for,” says Stark. “In those situations, I am always going to be a little suspicious.”
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
