Stock Market Video
Avoiding Stock Scams
Do Not Purchase Regret At Any Price
In Case You Missed It
In this week's Stock Market Video, Mike Cintolo talks about the rotational nature of this market, and how you can take advantage of favorable buy points by having a broad watch list. He also talks about some former (but still popular) leaders that look awful and should be avoided. Stocks mentioned include: Apple (AAPL), Salesforce.com (CRM), LinkedIn (LNKD), Cameron (CAM), Chicago Bridge & Iron (CBI), Bank of America (BAC), Citigroup (C) and Celgene (CELG). Click below to watch the video!
Avoiding Stock Scams
As a growth investor who also writes about growth investing, it’s hard for me to see much downside to the recent market rally that has produced some excellent gains. After all, the Cabot system for growth investing (used by Cabot Market Letter, Cabot Top Ten Trader and Cabot China & Emerging Markets Report) relies on—among other things—using the momentum of the market itself as a signal to become more heavily invested. Bull markets make money.
But I’ve just seen two items on the Internet that remind me that enthusiasm about the stock market can also provide opportunities for people who want to fleece the unwary.
The first item is a news story about the indictment of 15 people in California for stock fraud that took more than $30 million from 20,000 people in a pump-and-dump scheme.
In this kind of scam, operators buy a boatload of a cheap stock with nothing going for it but a story that can be sold. Then comes a high-pressure media blitz that pushes the stock’s price higher. In this case, the campaigns used actress Pamela Anderson and actor Eric Roberts to lend credibility (and sexiness) to the product, along with bogus news releases.
When the stock spikes from a low price (frequently just pennies per share) to a huge gain, the fraudsters sell out at the peak, leaving investors holding the bag. If you do this several times a year, you can make lots of money … and get indicted on charges that might get you 100 years in the Federal pen.
The second item was one I found at the bottom of a New York newspaper’s online site. It’s a long, repetitive advertisement for the stock of a nanotechnology company whose stock is now trading at about 60 cents per share. Great things are expected from this company, according to the ad, and from its stock. In fact, in one sidebar the ad says that, “We believe prospective returns of between 500% and 1,000% are realistic.”
Given that the only actual product referred to is a high-tech nail polish, this seems a bit optimistic to me.
So, since I was already tending toward a suspicious turn of mind because of the pump-and-dump story, I took a look at the stock of the company being promoted. I won’t bother you with the name, but here’s the chart.
Note that this OTC stock was trading sideways for most of 2012, then suddenly spiked to near 1.40 in November. But a little over a month after popping out of penny stock territory, the issue plummeted below its old range, and hasn’t recovered.
I’m not saying that this was a pump-and-dump scheme. But I am saying that if it were a pump-and-dump scheme, this is just about what its chart would look like. And if you had access to the information, you’d probably find that the people who sponsored the ad cashed out pretty quickly when the stock topped out.
In the disclaimer section at the bottom of this ad, which really did go on for pages and pages, there were two statements that made everything clear. I only saw them because I went looking for them, which is something I doubt very many people do.
The first statement says, “Remember, never invest in any security of a company profiled or discussed on this website unless you can afford to lose your entire investment.”
The second statement says that the XYZ company (not its real name, but it’s the company that put the ad up) “has received six hundred fifty thousand U.S. dollars from an unrelated third party,” and that “anyone viewing the website should assume the hiring party or affiliates of the hiring party own shares of [name deleted], which they plan to liquidate after publication of the promotional materials. You must assume that the liquidation of any or all of those shares may have a material adverse effect on the price of the shares of the relevant company or companies.”
You have to give these people credit for, if not honesty, at least a kind of very thorough covering of their *sses against possible legal action.
I don’t think I need to beat the moral of this little screed to death. The people who bought the stock that was being promoted should have known better. But few people would have the patience to scroll all the way to the bottom of this file and then the discipline to read through the (purposefully) dull blocks of disclaimer text.
What I will do is make the obvious point that Cabot doesn’t ever get paid a penny by anyone to promote any stock. We make our money by giving good advice to people who subscribe to our newsletters.
I sometimes get requests from subscribers to look at stocks that are being touted in elaborate mail promotions and in online ads similar to the one I’m writing about. And when they hear what the chart looks like and what the fundamentals are all about, they repent pretty quickly of their interest. Cabot provides the kind of advice and service (including answering questions) that puts us a universe away from this kind of malodorous scam.
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Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Do Not Purchase Regret At Any Price
Tim’s Comment: You don’t set out to purchase regret, of course; you set out to purchase a stock. Yet you may come to regret that purchase if the stock doesn’t do what you expect it to do—go up. Knowing that all stocks do not go up, and that it is impossible to buy only stocks that go up, the first step in avoiding regret is simply lowering your expectations. The second step is the tried and true method that improves results in any endeavor: practice, working to minimize your faults and maximize your talents.
Paul’s Comment: This is another gnomic message that can be interpreted several ways. Another possibility is that it’s telling you not to buy a stock at too high a price (especially after a long run-up) because it will only bring regret.
In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Editor Chloe Lutts of Dick Davis Dividend Digest writes about the inadequacy of bonds and bond funds as a major component of retirement plans; yields are just too low. Dividend-paying stocks can solve the problem. Stocks discussed: Kellogg Company (K) and Gladstone Commercial Corporation (GOOD).
Cabot Benjamin Graham Value Letter’s editor Roy Ward uses this issue to explore the PEG (price to earnings growth) ratio, a way to identify winning high quality stocks with good dividends and price prospects. Stocks discussed: Microsoft (MSFT) and Prudential Financial (PRU).
Mike Cintolo talks about using checklists to refine what you’re looking for in a stock, especially eliminating do-nothing stocks. Screening for price, liquidity, an upward-trending chart and sound fundamentals makes a great start. Stock discussed: Cameron (CAM).
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report