Wednesday, January 11, 2006

Penny Stock Spam Performance

Just read an article on Kiplinger's about the performance of penny stocks that you get spam email about http://www.kiplinger.com/personalfinance/magazine/archives/2006/01/pennystocks.html.

In the article they claim that Joshua Cyr tracked their performance over about a 6 month period. Net result: Down 52% during which time the Russell 2K was up 12%.

This begs the question, why are people spamming these stocks if they are going to plummet? Spammers aren't usually malicious people, they are usually people trying to make a quick buck - so my bet is that stock spamming is a pump and dump tactic.

So, the expected performance is:
Pre spam price = x
Post spam price = y
6 month price = z

Thus, knowing that they are spamming, it is rational that x < y. But it doesn't make sense to me why z would be less than x. It makes sense that z < y because the price change is driven by an artificial increase in demand and not improving fundamentals.

Great article, but i am left wanting more. I think I will just have to set up my own spamfolio to track the stocks I get spammed about and see what the results are.

If there is a definite discernable negative pattern to the performance of these stocks, then hot stock spam tips might just be the best contra-indicator you can find. I don't know much about short selling, but if 60% negative over 6 months is a generalizable phenomenon, I would kiss the idiots buying the stocks and the assholes sending this spam. Looks like I have two new projects for my to-do list.

If anybody who reads this is familiar with this topic, please post a comment with your knowledge. I know nothing about this beyond what I just read.

7 comments:

franky said...

It might be difficult shorting those stocks due to the fact that a lot of them are penny-stocks, pink sheets, or both. The cost of shorting might outweight the expected negative performance.

Mathieu said...

I got intrigued by such a spam about Lamperd Less Lethal, a safe substitute to Taser, about 2 and half months ago

reading your post made me want to go and check for myself

http://finance.yahoo.com/q/bc?s=LLLI.OB&t=3m

Indeed the stock is down 50% or so

Nice blog.

Big Mike said...

It may be that the people trying to pump these stocks are in the process of selling their positions.

Chris said...

Z is less than X because insiders, the main holders of the stock have dumped it. That is the nature of a pump and dump.

Anonymous said...

I think shorts are limited to stocks trading at $5 or higher, so it may be impossible to short these stocks.

Anonymous said...

i've actually tried one and it went up over 200% I'm at work so I don't have the stock id on me, but i'll look for it

Matthew said...

From what I gather:

Like mentioned, pump and dump is the scenerio. Hype the stock which will increase trade.

People who own a large stake in penny stocks are likely to count on small increases to make a sizable profit then dump it.

Penny stocks, especially otc's, tend to have very little volume. If the spamming works, the volume increases and will usually result in a small equity gain. This is where the hypers dump the stock.

Volume is said to be correlated with the price. Not always, but usually the higher the volume, the larger the capital gain.

Ignorant investors are usually the target and buyers of penny stocks. It's a sad thing but true.

Just like in the 2001 dot com bust, it was fueled by what Alan Greenspan termed "irrational exuberance" (I think that's how you spell it). Many analysts were ready to throw mathmatical pricing models out the window because the price of the stocks were way higher than the models showed the equites to be worth. The market came to it's senses though and the bubble busted.

Just like with penny stocks, after the spammers have taken their profit and pulled out, the investors that purchased the stock based off the hype are left with a dog and then the bubble bursts. Because the stock volume declines after the hype, so does the price normally. Investors who then hold these trash equities are left clinging to the equity in hopes that it will turn around. Most of the time it doesnt.

To wrap this up:

One must always ask the question, "Why are people telling you about a stock that is going to make a huge profit very quickly?" Most people would like to keep the secret for themselves. Penny stock spam is all done with dishonest intentions. However, many times it works.