Stock Promoters: Pump and Dumpers or Legitimate Business?

by JT McGee

You’ve been exposed to stock promotion before.

You might have received an email about a hot new penny stock. Maybe you found a pamphlet in the mail about the next hot company raising a new round of financing.

Whatever the medium might be, you’ve heard from a stock promotion service before. While I’ve been investing for years, I never really spent much time thinking about how the industry worked. That is, until it basically smacked me in the face to the point I couldn’t avoid it.

My Run-in with Stock Promotion

I have to thank Sustainable Personal Finance’s crazy stock market pick for sending me down the infinite research loop of stock promotion. One of his selected companies, MJNA, has had a killer year in terms of total returns. It’s up something like 200%, maybe 300% since the beginning of the year.

It’s obviously a legitimate company in that it actually exists, but it is obviously a startup in a new space – medical marijuana and other goodies. It’s tiny, too, with a market cap of $65 million. The stock isn’t for me as much as I love micro caps, but that has more to do with the industry and the fact it doesn’t have an auditor for its financial reports (why?!?) than anything else. (To be fair, they’re apparently planning on hiring an auditor soon. To be realistic, their reports are an accounting nightmare and I have a hard time believing the auditor will be added on time.)

Anyway, I’m getting off subject. I’m talking about MJNA today because it hired a stock promotion service. So far, that service seems to be paying off.

From a quick glance at its latest news on Yahoo Finance, I found that it was often discussed in tandem with an outfit known as SmallCapVoice. On the site, I found this – a disclosure on the relationship between MJNA and Small Cap Voice:

Small Cap Voice will receive five thousand per month for the next six months. Small Cap Voice also received 500,000 restricted shares subject to Rule 144 of the Securities Act of 1933 for the six month term.

Huge Money in Stock Promotion

Now, I don’t know the terms of the agreement between MJNA and Small Cap Voice. I don’t know exactly what Small Cap Voice is doing for the company besides issuing press releases every time someone sneezes and interviewing the CEO of the company to publish on its website.

But what I do know is that Small Cap Voice, as a stock promoter, is making a ton of money. At the current share price, Small Cap Voice stands to make $55,000 from its restricted stock and $30,000 in cash for promoting the company over the next six months. MJNA is hardly their only client, and this isn’t the first time the two have worked together.

Small Cap Voice is probably funneling some of that money elsewhere, seeing as other stock promoters report being compensated by a third-party to promote MJNA. You can see proof of that at this site, which tracks stock promotions for people who want to basically play these things like a short-lived ponzi scheme for fun and hopefully profit.

Is Stock Promotion Wrong?

Previously, I thought the price action following a pump and dump was all dumb money. Now I think a lot of it is from people who know what they’re getting into: subpar companies that may pop just because everyone else thinks they’re buying before the pump and dump rush. I’m finding a lot of sites that track penny stock newsletters just for the purposes of riding the waves they make. So I’m not as against it as I might have been; I have a feeling that most people know not to buy promoted stocks, and those that do buy them know what they’re buying.

Now, is there anything wrong with stock promotion?

The free market guy that I am says no, people should be able to pay people to say things. That’s free speech, free markets, and basically, America. But the more reasonable person inside me says that stock promotion is a crock. If companies needed investment dollars – legitimate investment dollars – the public wouldn’t be their first source.

Then again, investment banks make a killing selling businesses to the public; that’s basically what an IPO is. And this guy at Small Cap Voice is definitely bringing down junior analyst money with his business. And really, all big financial companies have an investor relations department which is basically in the business of selling stock by providing information about the company. Small Cap Voice probably argues that that’s what he does, too, seeing as he’s listed as the investor relations point of contact for the company.

Investor Relations: Don’t Hide It

I think my biggest problem with this is that the connections between stock promoters and public companies are hidden in tiny disclosures after huge claims, aggressive valuation methodologies, and emotional selling.

If you’re going to do investor relations work, why not do it in house? Why not start with proper documentation and good earnings filings? Why spend so much time in your earnings reports talking about the company when you can’t be bothered to waste a single line on revenue recognition.

Truth be told, there are plenty of tiny little companies that could use a hand getting exposure. There are plenty of tiny little companies run by people who are not financiers, stock pickers, or people who know what these people want to see. I think there’s a legitimate business in helping companies realize their fair value on the stock markets.

But stock promotion via email blasts, penny stock newsletters, and scripted conversations with executives? Meh. That just doesn’t sound so legitimate to me.

{ 3 comments… read them below or add one }

Darwin's Money December 10, 2012 at 23:39

I was surprised to learn there’s a whole underworld of stock promoters out there. Usually on major sites like seekingalpha, etc., readers quickly pounce on any articles promoting stocks and some people even look to short companies as soon as they catch a whiff.

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101 Centavos December 11, 2012 at 20:35

The Canadian exchanges are rife with pump-and-dumpers, especially with junior miners and explorers.

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Ken December 16, 2012 at 14:49

Investors are continually barraged by people appealing to their greed. Certainly people forget that they have to do the due diligence before they enter the market. What is amazing is that the heavy promotion is allowed by the regulators.

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