Promoted Stocks: Beware The Latest One, Fresh Healthy Vending


Promoted Stocks: Beware The Latest One, Fresh Healthy Vending  by David Merkel, CFA of Aleph Blog

Okay let’s roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 2/4/14 Decline Annualized Splits
GTXO 5/27/2008 2.45 0.014 -99.4% -59.9%
BONZ 10/22/2009 0.35 0.001 -99.6% -72.4%
BONU 10/22/2009 0.89 0.001 -99.9% -81.1%
UTOG 3/30/2011 1.55 0.000 -100.0% -95.0%
OBJE 4/29/2011 116.00 0.200 -99.8% -89.9% 1:40
LSTG 10/5/2011 1.12 0.017 -98.5% -83.3%
AERN 10/5/2011 0.0770 0.0001 -99.9% -94.2%
IRYS 3/15/2012 0.261 0.000 -100.0% -100.0% Dead
RCGP 3/22/2012 1.47 0.160 -89.1% -69.4%
STVF 3/28/2012 3.24 0.500 -84.6% -63.5%
CRCL 5/1/2012 2.22 0.015 -99.3% -94.1%
ORYN 5/30/2012 0.93 0.132 -85.8% -68.6%
BRFH 5/30/2012 1.16 0.440 -62.1% -43.8%
LUXR 6/12/2012 1.59 0.013 -99.2% -94.6%
IMSC 7/9/2012 1.5 0.780 -48.0% -34.0%
DIDG 7/18/2012 0.65 0.038 -94.2% -84.0%
GRPH 11/30/2012 0.8715 0.108 -87.6% -83.0%
IMNG 12/4/2012 0.76 0.070 -90.9% -87.1%
ECAU 1/24/2013 1.42 0.225 -84.2% -83.3%
DPHS 6/3/2013 0.59 0.007 -98.9% -99.9%
POLR 6/10/2013 5.75 0.060 -99.0% -99.9%
NORX 6/11/2013 0.91 0.225 -75.3% -88.3%
ARTH 7/11/2013 1.24 0.300 -75.8% -91.7%
NAMG 7/25/2013 0.85 0.230 -72.9% -91.5%
MDDD 12/9/2013 0.79 1.150 45.6% 1009.0%
TGRO 12/30/2013 1.2 0.350 -70.8% -100.0%
2/4/2014 Median -92.5% -85.5%

Tonight’s loser-in-waiting is Fresh Healthy Vending [VEND].  But before I go there, let me point you to an article I read today regarding promoted stock scams.

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We’ll start with the fact that there is [sic] essentially four kinds of penny stock companies in the Pump & Dump world: (1) the kind where the management is in on the scam and is directly knowledgeable and complicit with the intent to deceive the public; (2) the kind where some poor schmoe has a great idea (at least he thinks it is) that requires financing, and becomes the mark of a parasitic “funder” who makes all kinds of promises of unlimited monies and riches beyond the mark’s wildest dream; (3) the kind where the company is absolutely for real but the shares have been hyped (sometimes hijacked) into ridiculous valuations; and, (4) a hijacked empty and inactive shell.

The following article explains each type of promoted stock scam.  I appreciated it, because it clarified my thinking — I’ve seen all four of these, but I did n’t realize it until now.  My error was looking for one common modus operandi, when there are a variety of parties that can benefit from a stock promotion.

Fresh Healthy Vending fits the first category of promoted stock scams.  Read this portion of the Disclaimer:

The Wall Street Revelator and/or its publisher, Andrew & Lynn Carpenter, dba The Wall Street Revelator has received a total amount of Seventeen thousand five hundred dollars in cash compensation to assist in the writing of this Advertisement, as well as potential future subscription and advertising revenues, the amount of which is not known at this time with respect to the publication of this Advertisement and future publications. Brown Dog Marketing, Inc. paid two million three hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this Advertisement, including printing and postage, in an effort to build investor and market awareness.

If successful, the Advertisement will increase investor and market awareness, which may result in increased numbers of shareholders owning and trading the common stock of Fresh Healthy Vending Inc. increased trading volumes, and possibly increased share price of the common stock of Fresh Healthy Vending Inc.

Brown Dog Marketing, Inc. was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign. The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign. Non-affiliate shareholders acted-as-advisors to Brown Dog Marketing, Inc. in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

The bolding is mine.

The scam is rarely this bald.  The type for the disclaimer is 5 or 6 points.  Very tiny, though I have seen smaller.  But why be so plain?  Because few read it, and it immunizes them from any lawsuits.

In this case, one guy owns ~65% of the company, and he got the shares at a very low cost in the reverse merger that converted a “green advertising” company into a company that vends healthy snacks.  He has a history of his own that should raise a yellow flag.  But the rest of the holders that provided financing, have the chance to get out at much higher valuations as a result of the pump and dump going on here.

As a result of the reverse merger, this is a real company, unlike most promoted stocks.  It has real revenues, but still has negative net worth and regular losses.  Why this company has a market cap over $100 million is a mystery to me, aside from the promotional activity over the last few months.  Aside from that, its revenue growth is slowing, and it faces a number of lawsuits over its behavior as a franchisor.

Given trading volumes since the promotions began, it would not surprise me if the selling shareholders are out of their positions in full by now.  It would also not surprise me if this company did a PIPE or a secondary to monetize the gains of the main holder at a lower valuation.

As with all promoted stocks, this is something to stay away from.  On a speculative level, one can never tell where a stock like this will break down, but I can tell you this, it is coming soon, and holders at this price level will lose money.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.