Wednesday, October 29, 2014

Old Pump 'n Dump Returns!

Get Ready For The Rally! OUR HOT PICK!

Company: J. C. Penney Company Inc
Get it at: $7.43
Date: Oct, 29th
Symbol to buy: NYSE:JCP
Short Term Target Price: $10

This Company is Creating a BUZZ, so BUY NOW! Tomorrows Monster Stock!

Buying stock based on anonymous e-mails is a really bad idea.

In the SPAM box for the last week has been the above "stock pick" touted by an anonymous sender (who sends under a variety of made-up names, so you know he's legit, right?).  The Pump 'n Dump scheme has been around for ages - even children can play - but what makes this one interesting is that they are using a mainstream stock (albeit one that is nearly dead) as part of the scam.

The scam is simple.   First, find some cheap, obscure stock in the "penny stocks" category.   These are stocks, usually for small companies, that are rarely traded, and are worth little to nothing.   You find one with a name that sounds kind of tech-y and such.  Maybe "Tech-co" is good.  You buy up a lot of this stock - as much as you can afford - at a penny a share or so.   The very fact you have purchased so much stock (maybe only $100 worth!) makes the price go up to two cents.   Suddenly, there is a demand for this sleeper stock!

Next, you buy a e-mail list from some dubious source, such as Russia.   For a few dollars, you can buy a few million e-mail addresses.   You then set up your e-mail account (preferably using some scheme to send the e-mails from an untraceable source, such as a Botnet of Zombie computers.)   Again, your Russian friends may be able to help.  The e-mails tout "Tech-co" as the latest and greatest stock.  They have a new product coming out!   What's more (thanks to your buying) the stock has doubled in price in the last 30 days!   Better jump on the bandwagon before it is too late!

Now you wait.   All the chumpsters out there, who believe in Fairy Godmothers and something-for-nothing (about half the United States) get your e-mail and think, "Gee, this is it!  My ship has finally come in!   An anonymous person is sending me a stock tip that will make me rich beyond my wildest dreams."

And so the chumps buy.   And they buy.   And since they are buying this unheard-of stock which hasn't changed in price in ten years, the price suddenly shoots up to 3 cents a share - then 4, then 5!   Wow, that anonymous e-mailer was right!   This stock really is going somewhere!   It tops out at 7 cents a share.   Meanwhile, you've dumped your shares at 6, making a nice $500 profit on your $100 investment.

Of course, the next time around, you can buy a lot more stock than $100 worth.   Pretty soon, you are buying blocks of penny stocks for tens of thousands - hundreds of thousands - of dollars.   The teenager who popularized this scheme reportedly made millions - while still in high school!

Of course, eventually, the stock peters out and drops back to a penny a share.   As it turns out, there was no "there" there in Tech-co, and once people stop buying the stock, the price plummets.

Well, OK, you say, this seems like an obvious fraud.   Who takes investing tips from anonymous e-mails?   Only greedy idiots would do that, right?  And greedy idiots get what they deserve!

But these schemes are just egregious examples of what happens in the stock market all the time - legitimately.   You see, whenever one of the financial channels or columns or websites, or the shouting guy on TeeVee just mentions a stock, the plebes go out and buy that stock.   Demand for the stock rises, and thus so does the price - the law of supply and demand.  And at least initially, the prognosticators can say they were "right" - as the stock price went up!

The real "value" of the company, however, has not changed overnight.   Prognosticators will say the company is now worth umpteen billion dollars, based on its "Market Cap".   But as I noted before, things like "Market Cap" are bullshit.   The price of the last share bought is not an indication of the overall value of a company.

In fact, stock price often is an erroneous indicator of a company's value - in the short-term or the long-term.  Just because you paid $10 a share for Tech-co doesn't mean the company is "worth" $10 times the number of shares outstanding.   If the founder of Tech-co (who owns 60% of the shares, and you'd know that if you did the research) decided to sell all his shares at once, the price per share would drop dramatically - the law of supply and demand kicks in again.   When you flood the market with shares, there are not enough buyers to snap them all up, so the price drops.

Right there you can see that it is possible to control the price of a stock by controlling how much of it is available for sale.   Certain stocks have outrageously high prices, simply because a lot of people think they are "valuable" and thus hang onto them - rather than sell them - and thus not a lot of shares are available for sale.   Similarly, if a company decides to raise capital by selling more stock, it floods the market with new shares - which can bring down the price of existing shares if there are not enough buyers ready to buy.

In other words, share price is less an indication of a company's overall value than it is an indicia of the supply and demand for the shares.   Stocks are just products - like the items on the shelves in your grocery store.   How much each item costs depends less on how much it costs to make, and more on how much demand there is for the product.   It does not cost a lot to make Caviar.   However, there isn't a lot of it to go around.  Hence, prices are high. 

The price of most commodities works the same way.  The price of oil has dropped lately, because demand is down and there are a lot of distressed Middle-Eastern countries willing to sell it.   It has little to do with the cost of drilling for oil, but rather the supply and demand in the marketplace.  In 1973, when the Arabs shut off the tap completely, the price of oil skyrocketed overnight.

So that is why you see some stocks with outrageous prices.  Linked-In, for example, is selling for over $200 a share, and has a P/E ratio of over 700.   You'd have to hold this stock for 700 years, at today's P/E ratio, to break even.   Apparently there are a lot of people who like this stock - or who think the company will become wildly profitable in the next few years (I'm already sick of Linked-In and its constant needy pitches to join - aren't you?).   But people believe that is will be worth something down the road, an hence have driven the stock price up.   The stock price, however, doesn't represent the real value of the company.

And often, companies can go their entire lives without turning a profit or making much money for their investors.  And tech companies are particularly prone to this.  As I noted in an earlier posting, Nevil Shute Norway, the fiction author, also founded an aircraft company, Airspeed, which made a number of aircraft for nearly three decades, before being acquired by Vickers.   The company rarely, if ever, paid a dividend, and in the end, he noted, the original investors would have been lucky to get their money back, after nearly three decades of investment.

Airplanes were the "high tech" investment of the day, and he recalls that when some shipbuilding companies invested in Airspeed (and put members on the Board) they could not understand the financing of this new industry.   After all, with ships, you made a profit on each one you built.   These airplanes made no sense - the company was building them like mad and selling each one it made, and yet still losing money.

And that right there is a cautionary tale for those who want to invest in tech companies or internet stocks that never seem to earn a profit or pay a dividend, but promise that "right around the corner" huge potential exists.  You see, the problem is, your best-selling biplane of today is outdated in a matter of months, and you have to go back to the drawing board, start over, and possibly sell more stock to pay for the next "latest, greatest, thing".    These sort of investments are not for the faint of heart.   And usually the stock prices reflect people's beliefs about the value of the company - not the actual value in terms of profits made and dividends paid.   Belief is a powerful thing - but one best left to answering questions like, "Why are we here?" and "What happens when we die?" and not "What should the share price of Tech-co be?"

Again, the missive I received (about four times now) is interesting in that it is not targeting a penny stock, but rather what was once a mainline stock of one of the largest retailers in America.   The problems with J.C. Penny are well-known.   Many assume that it will be bankrupt within a few years.  Whether such an old-line "chain" store can "turnaround" its sagging market share, store closings, declining revenues, and cash hemorrhaging, is anyone's question.   J.C. Penny has the same problem that GM did - when a company shrinks in size, it ends up with more people collecting pensions than are employed.  Pretty soon, the retirement costs (for the previous generation, who retired when the company was strong) make up a huge chunk of the overall operating costs.

While it is possible you may see a "dead cat bounce" on this stock, I doubt it will go up dramatically in the short- or long-term.  The problems plaguing old-time retailers are not going away anytime soon.  And this is true for Kmart/Sears as well as Radio Shack, which seem to soldier on, in spite of increasingly difficult and long odds.

Note also that the e-mail above sets a "target price" for the stock.   Now of course, you would say that is a totally specious number that is taken out of thin air.   After all, this is from an anonymous e-mail, right?   But the prognosticators on the financial channels do this all the time - shouting "buy" or "sell" and quoting "target prices" that they pull out of their ass (with both hands).   These "target prices" are never explained in any detail.   What would drive the price of the stock up (other than a pump 'n dump scheme?).   Are profits up?   Are dividends up?   Are sales up?   Has management cut overhead and expenses?   What?

Sadly, these "legitimate" financial news sources are about as reliable as anonymous e-mails.   And that is one reason right there not to listen to them.   If you buy and sell stocks based on what the media says, chances are, you are going to trade yourself right down to nothing, in a short period of time.  The idea that one can outsmart the market with some sort of "system" or trading scheme or tip sheet is flawed.   You might as well go to the horse track - which offer the same systems and tip sheets.  The trading companies will be happy to take your money, though!