The following article was taken from another board and was written by Guapo (someone that i highly respect and who has taught many much about the market.) A couple of paragraphs that were directed to another investor were edited by me.
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Company Pump & Dumps And Red Flags by Guapo
This is a post about company pump and dumps, those conducted by companies, selling their own stock. It does not discuss pumps and dumps conducted by organizations or groups of individuals (Group Plays) outside or not associated with a company.
Part 1 of 4 Parts
As with all companies, not just the pennies, investors have to watch and see if the company produces. Pumps and dumps continually promise everybody everything except the moon, and they would promise that too if they could get away with it. However pumps and dumps rarely deliver on their grandiose promises of the future.
If a penny company wants to establish rapport and trust with the investing public, it must prove itself to be legitimate by demonstrating verifiable progress and results in its business.
How do I determine if a company is a pump and dump? I look for red flags. If I see five or more red flags on a company, I will then assume it’s a pump and dump. What do I consider red flags? Here's a list.
1. Grandiose predictions in PR~s that simply do not seem plausible
CMKM (stock symbol CMKX) was a good example in 2004 or early 2005. Out of the blue they announced they had a gold mine in South America and would start shipping the ore by boat to the U.S. for processing. Knowing what it cost to ship anything these days, it seemed prohibitively expensive. It did not appear logical to me. As it turned out, CMKM never shipped a pound of ore to the U.S., nor did they ever recover a single gram of gold. Their stock was deregistered last year and the company went out of business.
2. Fluff or fluffy PR~s that have nothing of substance in them
Such PR~s are simply hot air and nothing more, designed only to keep the company’s stock in the foreground. Announcements of Joe Blow joining the board of directors, or Peter Piper promoted to the position of chief engineer are worthless. Proclamations congratulating other companies or organizations for their achievements or accomplishments are meaningless.
3. PR~s containing weasel talk
Weasel talk is language that appears to say something concrete but doesn’t really. Weasel talk is highly prevalent in PR~s.
For example, a company issues a PR with this phrase in it, “The board of directors today announced it has approved a stock buy-back plan of 700 million shares.”
It sounds dandy, doesn’t it? When that PR hits the street, the PPS will probably zoom, at least move up some anyway. However, the PR does NOT say the company will actually buy-back 700 million shares. The board only approved the buy-back. The company is under no legal obligation to buy-back shares.
Suppose another company issues this PR, “The company feels a stock buy-back is in its and the stockholders’ best interests. Therefore we will buy back up to 500 million shares to reduce the float.” Note the words up to in the phrase. That means if they buy back ten shares, they have satisfied the requirement.
Some folks have argued strenuously with me on this point, claiming companies can not say such things in PR~s and get away with it. “It’s illegal,” they say. Unfortunately it is not. The companies are operating well within the law.
Company Stock Pump & Dumps And Red Flags - by Guapo
3. PR~s containing weasel talk (continued)
Other common phrases you see in PR~s include, “The company intends to…”, “The company foresees a profit of…”, “The company has signed a contract with…”, “The company anticipates $20 million profit from its contract with…”.”
Any phrase announcing their intention to do “such and such” is not binding by law.
If a company intends to…. “Well, our plans changed.”
If the company foresees a profit of… “Errr, sorry, it didn’t work out as we expected.”
If a company signs a contract with… “We did but after a week, the other company canceled it.”
The company anticipated… “Gee, we really over-estimated our profits on that one, didn’t we?”
Companies can to some extent be held liable for specific declarations that they don’t accomplish. For example if a company says, “We will buy back 200 million shares of stock by the end of this month,” and they don’t, then stockholders may (possibly) have a valid grievance.
4. Failure to live up to, within a reasonable time frame, actions and goals the company said it would accomplish, accompanied by the lack of a logical explanation why it failed
A company that accomplishes nothing, or appears never to do so, indicates one of four possibilities, the company is incompetent, lazy, is in the wrong business, or is a pump and dump. Any one of these makes it a risky investment.
5. Pinks failing to file (voluntary) reports to the SEC
Agreed there are reasons why a pink may want to remain so. It’s a red flag for me however – one strike automatically against them – because there’s very little verifiable information about pink companies. The pinks are where most of the abuses in the stock market occur. I don’t especially like trading the pinks but so often that’s where the action is.
6. OTCBB companies failing to meet their filing deadlines
If a company can’t get their paperwork done on time, how competent is it in its business? It can also be an indication the company is hiding something.
7. Previous reverse splits, stock symbol and company name changes, sometimes accompanied by changes in the business they’re in
This is a serious red flag for me. A company that pulls a R/S is likely to pull a second and third one. Reverse splits are almost always done with a stock symbol change. A stock symbol change makes it more difficult to trace the history of the company.
Companies that pull reverse splits, change their stock symbol, the company name and re-invent themselves with a new business are demonstrating they haven’t been successful in the past. Successful companies don’t pull reverse splits, change their stock symbols and re-appear as new companies. A company re-inventing itself in this manner often makes it extremely difficult to trace its history. Usually, in my opinion, companies that do such are pump and dumps and nothing more.
Great information fireopal! I wonder how these 'make believe' companies are able to even issue stocks to be traded? I mean, could I go down to the county courthouse, get my DBA and start issuing stocks? Do they have to be incorporated? I don't know anything about that process of how a company issues shares of stock but it seems those companies would have to present some sort of credentials to even get started trading, even as pinks. Who does all the paperwork and arrangements, how do they get a ticker symbol? etc etc.
Also, what is A/S ?
Thanks.
Quote:
Originally Posted by lovemoney View Post
Great information fireopal! I wonder how these 'make believe' companies are able to even issue stocks to be traded? I mean, could I go down to the county courthouse, get my DBA and start issuing stocks? Do they have to be incorporated? I don't know anything about that process of how a company issues shares of stock but it seems those companies would have to present some sort of credentials to even get started trading, even as pinks. Who does all the paperwork and arrangements, how do they get a ticker symbol? etc etc.
Also, what is A/S ?
Thanks.
glad you liked it and beyond any doubt this is one of guapo's best articles imo and is why i brought it here.... helped me in a very big way to better understand playing versus investing in most penny companies...
a/s = authorized shares...