I've asked Travis Johnson of www.StockGumshoe.com to be today's guest blogger. Travis has built up quite a following as being a detective of sorts, of email and newsletter teaser ads. Today Travis is going to share with us an interesting story that shows just how much stocks can be effected by hype. Enjoy!
Most of us are quite familiar with investment newsletters and trading services. I focus on the newsletters that advertise heavily to retail investors, and the most successful type of ad is apparently the “teaser” letter, a well-argued case for a particular stock or investment ... that withholds the actual name and ticker until you throw your subscription dollars into the hat.
Thankfully, with a little research and some critical thinking we find that many of these “teasers” can be solved, letting us reveal the names of the stocks, get people started on their research, and make patient decisions about newsletter subscriptions (and investments) without relying on impulsive “tell me the name of that stock” urges.
The implicit promise is that these “teaser” stocks represent the best ideas of these often well-known newsletter editors, whether it’s the Gardner brothers at the Motley Fool, Louis Navellier, Paul Tracy, or any of dozens of others whose names you would probably recognize.
One stock in particular represents the promise, and peril, of these kinds of teasers -- and the ad is still circulating today, so let’s use it as a quick case study.
Have you heard of the “forever battery?”
The company that “makes” this battery was first teased by the folks at the Untapped Wealth newsletter in a heavy ad campaign early in 2008 -- it turned out to be, once we followed the clues, a small firm named mPhase Technologies that used to develop DSL technologies, but was now throwing itself into the nano-battery development business. I like to talk about this one because it has been actively promoted at several distinct times in the past year, and because it’s a microcap stock that is easily influenced by what could be even a small number of new investors. And because, of course, the company has few fundamental drivers like earnings, or sales, that would help to explain movements in the stock.
The first newsletter ads teasing this “forever battery” went out in early March of 2008, and they must have struck a chord with investors because the volume of email picked up dramatically by the beginning of April, with Untapped Wealth promising that the company was on the verge of a public demonstration of their technology (they actually did demonstrate the technology, as promised -- at a steakhouse in Manhattan, of all places).
Then the promotion was sent out sporadically for the following few weeks, including a number of times in early May that caught my readers’ attention. I continued to see occasional copies of similar ads for much of the summer, but nothing that was in such heavy rotation that my email box filled up as it had in the Spring.
Can you guess where on the chart those emails hit? Hint: Just look at every point where volume increased and the shares rose, those were almost all timed exactly following periods when many of my readers received this email ad.
More ads came out in September that claimed a “catalyst” for the shares was around the corner, which helped to slow the stock’s decline for a few weeks. Then in early December a couple of industry awards and an announcement that the company had entered a “critical partnership” with Porsche Design to develop their “Always Ready” emergency flashlight provided a big boost in volume that helped drive the shares up significantly (though they remained well under the price they traded a year ago, before the newsletter hype began in earnest). This was the first time all year, in my opinion, that the shares had moved without heavy advertising by Untapped Wealth, but just as with those ad-fueled spikes, the move was quickly reversed.
This week? Yet more campaigns rolled out, using much the same ad copy and argument as they had made a year ago, with the shares about 90% off their highs of the year.
Back in March of last year, the promise was that these shares were expected to go up by 3,600% in the next twelve months, with the shares then trading at six or seven cents a share and spiking briefly to nearly 15 cents ... now the shares are trading for about one and a half cents each, and in the current ads these same folks are expecting, you guessed it, 3,600% gains in the next twelve months.
The point here is not to single out Untapped Wealth or mPhase, but to point to the impact that even an apparently legitimate newsletter teaser campaign can have on a stock, and to provide one example from among hundreds of an ad that is sent out repeatedly (sometimes over the course of many years), with very little change to the copy, not because a stock idea is working but because the ad is working to bring in new investors.
Similar patterns have held true for many stocks that have been actively teased by investment newsletters, especially when a newsletter with a big advertising budget or large email list hits on a stock with a relatively small market cap -- a good ad drives new subscribers, and those subscribers are primarily motivated by this one stock idea, so they’re likely to buy the stock immediately.
Some of my readers have tried on occasion to trade off of these touts, but of course it’s never quite that easy -- as you can see from the XDSL chart, you would have had to be very nimble for this one, and even for stocks with market capitalization's of $500 million or more the resultant action can be wildly unpredictable.
Louis Navellier, for example, ran two very aggressive ad campaigns for his newsletters last Summer that promised dramatic near-term moves in a chosen stock -- in one case, the ad apparently worked well and it was repeated several times, which helped drive the shares of Gran Tierra Energy (GTE) higher for a few weeks. In the second case, with an extremely similar ad for Fuel Systems Solutions (FSYS), the ad went out only once, on a Sunday, and the bounce from that ad was very brief -- not because the fundamental prospects for the company were necessarily different, but, one assumes, because the ad didn’t work well enough at bringing in subscribers, so they didn’t mail it a second, third or 15th time.
As for that “Forever Battery” from mPhase? It may well be that the company’s technology ends up working someday, or becomes a real product. Perhaps even a profitable one, in the distant future. The stock? A great story, well told by a master copywriter, that sold a lot of newsletter subscriptions ... so far, that’s about it.
For more on Travis and to take a look at more of his handy-work be sure to check out www.stockgumshoe.com/about.