We’ve written about the “next Cisco” before — last time, it was DivX and it was being teased by Brian Hicks … not terribly successful, so far.
This time, however, we’re looking at another older teaser that’s made the rounds many times — I’ve seen it going back to at least March. And since this is a microcap company, we’re going to do a little bit of educational math, too.
Wait … come back! I promise you won’t have to do the math. I just want to take advantage of the fact that this same stock has been touted consistently over nearly a six month period to look at the impact that email teaser ads (let alone full recommendations) might have on the stock price of these smaller companies.
But first, a little gumshoein’. Let’s figure out what the company is.
Some of you already know this one — and it’s one of many Tobin Smith ChangeWave MicroCap recommendations that focus on internet broadband and the need for speed.
Appropriate, since he builds this newsletter on identifying big trends, in part by using his ChangeWave network of professionals who fill out regular online questionnaires (I’ve been invited to that network, which comes with some free access to his newsletters, but have never joined).
As far as I’ve seen, Smith then tries to find small companies, often microcap companies trading over the counter, to capitalize on them. One other one in a similar vein that we looked at earlier was Voyant, which sells the Rocketspeed net acceleration technology. That one’s down 20%+ since I saw his email ad.
This one, though, is probably a more appropriate use of the “next Cisco” moniker that Hicks applied to DivX, since it’s a network switching company that really aims to do very nearly what Cisco’s core business does, only better. “Next Cisco” teasers are nearly as thick on the ground as “next Berkshire Hathaway” and “next Google” teasers, but I guess the little guys have got to aspire to something — and it’s hard to tear down any of those three.
So what do we know about this company from the myriad emails that urged us to buy?
From Smith’s email of early August, “a tiny company, trading on the OTC Bulletin Board, [has] developed a new network architecture and switch technology that blows away the established standard.”
Company is less than four years old.
Their technology solves the “hub and spoke” problem of current networks that jams traffic.
“Its breakthrough technology delivers up to 1,000-times the speed at about one-fourth the price of older technologies.”
This “new technology takes up less space…burns less energy…and costs about one-fourth the price.”
Well, as some of you already know (there were many more clues in the email that I’m too lazy to translate, as well as others in the dozens of similar emails I’ve received), this company is …
Raptor Networks (RPTN, trades OTC).
The company actually does a pretty good and clear job of explaining its technology and products on its website if you’re interested in learning more — it’s still mostly gobbledygook to me, but I get the basic point.
Of course, whether or not it’s possible for anyone to take market share from Cisco with a whole new type of product is quite debatable. Smith does note that their path forward might be a sale of the company to a big player in this space who can better get customers to “take a chance” with something new. In various emails he intimated that he thought the company might be sold for over $10 in the next year or two, or twice that if they hold out longer.
That’s certainly a ways off in the distance, and might take some sort of leap of faith. I’ve put down a small amount of money to gamble on shares of this one myself, since I sometimes have as much trouble resisting emotional investing urges as anyone else, but here are some things I don’t know anything about:
Do competitors have even better technology in the works — or, worse yet, can Cisco develop something just as good without violating their patents? I just read an article that made me terribly jealous that was all about the dramatically higher broadband speeds that are available in Japan and Korea already … would a better network change the need for better switches? Dunno.
And some of this can be a bit confusing — I’ve seen even ChangeWave tease this stock as offering 100X the speed at one half the price, and as offering 1,000X the speed at one quarter the price. Others have said it offers 1,000X the speed at one tenth the price. I don’t know which is more accurate as of today, or if all might apply but to different products or comparisons.
The company has been able to get government certification, which Smith thinks will be a catalyst for future orders … but will that convince anyone else to try their technology? And even though the government CAN buy it, does that mean they WILL? Smith is particular interested in the defense market, since they have so many high speed network demands. Only time will tell on that, I guess.
And when it comes to time … how much time do they have before they need to come up with some earnings, dilute investors, or sell the company? According to the Yahoo Finance summary, they don’t have all that much cash on hand and their sales are well under 1 million dollars. Debt isn’t so bad at under $2 million, but would still be hard to service if they don’t become profitable relatively soon. The ChangeWave guy thinks they break even if they have sales of $2.5 million/quarter.
On the other hand, the ChangeWave folks talk about this as having potential for several multimillion dollar deals. They go so far as to say that there’s a strong likelihood that they’ll have $100 million in sales by the end of next year, which would be more than 100X as good as last year. So that would certainly be, to underplay that a bit, positive. If it happens.
But some of you know this company already, and all of you can go forth and do your research if you want to understand it better or possibly lay some chips down on the red or the black. I have something else I want to examine.
If you’ll indulge me a moment, I want to see what the email teaser ads for ChangeWave MicroCap that mentioned this company might have done to the share price since March of this year when I first started paying attention.
The first email I saw from Smith on this was on March 13 … “The time to buy this little microcap is NOW … as I write, you can still get it for about $1.40 per share. “
The shares traded in the 80-90 cent range more or less for the three months preceding that, but on March 6 they jumped to 1.20 (just guessing, but I wonder whether either a formal recommendation or another ad went out on that day) …
Then, when I got this email on the 13th, it jumped further over the next couple days, dipping slightly on the 14th then up to 1.71 on the 16th …
Then March 27, another email — this one shorter and more focused on just Raptor (though not mentioning it by name, of course).
“Once we get that formal thumbs-up and the first big commercial order – likely a matter of days – this stock is going to fly.”
That one didn’t move it so much in just a day, and of course I can never tell whether they’re testing different email lists, or whether the ad reaches 1,000 people or 200,000 in a given day. The shares were at 1.60 then, and Smith said he wouldn’t be surprised if they doubled in a month as new orders were announced. (Still hasn’t gotten that high yet.)
And this time, he even added a video alert to the teaser, to go along with a half-price offer — and he was excited about the fact that their approval by the military would mean huge sales increases. “Up as much as 500% over the next 24 months,” was the biggest promise from the video. (As of today the video is still up, FYI)
Next time I saw a teaser email for this one — and remember, I have no idea when the actual recommendations went to his readers, but I imagine that more people see the ads than see the actual newsletter — was April 2. The shares had been down to 1.28 on the trading day before that, but jumped up to 1.40, 1.53, then 1.75 on April 2, 3 and 4. These are still tiny numbers, but note that that’s a bump of 37% in three days that, as far as I can tell, saw no releases of information from the company.
Then a reader forwarded me another email from Smith extolling the virtues of this company yet again, and still selling MicroCap for half price …
“As I write, you can still get it for under $2 per share. But there’s a powerful catalyst set to rocket the share price higher, and when it triggers, likely in a matter of days, I doubt we’ll ever see this price again [emphasis added]. We’ve already tripled our money from it at ChangeWave MicroCap Investor. But I expect that it’s still a 5-bagger, or even a 10-bagger from here.”
He later notes that you can buy 3000 shares for about 5000 bucks still, so doing that math I judge that he originally sent this email when the shares were probably between 1.60 and 1.80, which is where they traded a couple days before I saw the email. So let’s say April 13 at 1.78, just to be a bit generous.
The shares leaped again — this time, over the next ten days or so they got up to 2.20 on April 25th.
Another email on the 26th, again virtually the same email teasing the same stock — by the time I read it, the shares had dropped to $2 again.
Throughout the month of May I didn’t get a single email teasing this stock (doesn’t necessarily mean that none were sent, of course). And the price? We can only generously say that it “dwindled.” From the 27th of April when it was just over $2, it fairly gradually fell as far as 1.19 at one point (these are all closing prices, by the way), then rallied to close on May 31 at 1.49. Still, a 25% loss in the month when Toby Smith had moved on to teasing an LED company in the bulk of his ads.
And really, it started to look to me like Smith’s urging was having less and less effect on the shares. Emails went out teasing this one still more on June 2 and 6, but investors managed only to keep the shares in the high-1.30s for the first half of the month. Did everyone who was intrigued by this company already subscribe to MicroCap? Was the potential exhausted for this one teensy company, and no one else could bother to get interested?
Well, there’s still room for little blips when an email hits enough people, in my opinion. The shares sunk to a low of 85 cents in mid-August, and then emails started appearing in my box again. On August 21, I and several readers got strongly worded teaser emails recommending MicroCap investor and teasing this stock as the “Single Best Stock to Buy Now”, and the shares jumped to 1.12 on the 21st and 1.30 on the 22nd. That’s 85 cents to 1.30 in four trading days, another quick gain of just over 50%.
Over the week since then? No emails that I’ve seen, and the shares have fallen back a bit but more or less stood still in the 1.13-1.18 range.
Can all this movement in the shares of one tiny company be attributed to the recommendations and advertising of Tobin Smith’s ChangeWave MicroCap Investor?
I can’t say that — I certainly don’t have all the facts. I can say that I saw no actual news or earnings releases from the company that seemed significant enough to me to cause that kind of movement on those dates, and from looking at the email ad patterns and the price of the stock it certainly seems likely to me that those emails, which likely drove new subscribers to ChangeWave who would have wanted to immediately pick up shares of such a compellingly-marketed stock, and perhaps the actual stock recommendations themselves, are significant drivers.
This isn’t to say that Smith or his publisher is doing anything wrong, let me make it clear that I don’t think he’s pumping the stock for his own personal gain, and I hope that’s not how my writing reads.
I would be shocked (and I don’t think I’m being naive here) if that kind of thing happened at any of the larger or reputable newsletters that you or I have heard of — they can make lots of money, often incredible sums, from subscribers if they keep their subscribers happy, and they would lose all credibility, and most of those subscribers, if they were caught acting in a way that wasn’t in their subscribers’ best interest.
That’s not to say that their marketing language won’t move a stock, as the sheer impact of a few hundred thousand people just showing a modicum of interest in a small cap stock couldn’t help but influence the shares, but I would expect that the reason for the marketing language is always to sell subscriptions, not to move the stock.
Whether or not they intend to impact the share price, they often do — and of course, the level of the impact is I’m sure related to some kind of combination of the following:
The market cap of the company.
The strength of the marketing push or the wording of the recommendation (ie, “here’s an interesting gamble” versus “this is the best stock to buy now”)
The size of the newsletter readership (number of subscribers).
And the size of the marketing campaign for that newsletter that focuses on a particular stock (ie, how many email ads do they send out, how often?).
While I expect the impact on large cap stocks is almost always very minimal, even from recommendations by huge newsletters like Navellier’s Blue Chip Growth, for example, the impact on stocks that don’t have large market caps or that don’t have a lot of institutional ownership might be significant. I’ve heard anecdotally, for example, that the Motley Fool Hidden Gems subscriber list is so large now that you almost always see a big spike in their recommendations (which are all sub-$2 billion market cap companies) on the afternoon that the newsletter comes out.
But I think this impact is magnified when fairly large email programs and subscriber bases are exposed to a true microcap stock, which is part of the reason that I’m often leery of microcap companies that are teased and heavily promoted, even if they’re profitable (rarely) or do genuinely seem to have good prospects.
At the very least, if you are someone who likes to trade around these kind of recommendations or throw down an occasional Vegas-style gamble, note that in many cases the shares come right back down again when buying interest from the steady teasing/advertising of a company tails off. The future earnings for many of these companies can be many years away — there’s often time to be patient.
And now, let’s toast the holiday weekend by congratulating the Gumshoe for writing what has got to be the most long-winded post in history … and on a day when probably a small portion of the regular readership will see it. Now that’s good timing!
Full disclosure: after following this one for a long time after seeing Smith tout it, I did pick up a few shares of Raptor Networks a while back and I still own them. I consider this gambling/play money because I think the technology is interesting, but have kept my position small because I think it’s equally possible that the shares will drop precipitously if big orders don’t materialize in the near future.