I'm not here to pass judgment, but only to present the facts.
We all get email that teases stock market information. Just last week, I received one from The Motley Fool telling me about Tom Gardner's Hidden Gems small-cap stock newsletter. The general formula for these kinds of emails is to talk about performance, and make an offer for a free trial to the newsletter. Because Tom's stocks are beating the market fivefold, I took the free trial.
Lest ye think this some cheap plug for the newsletter (it is), I'm mentioning it because of what I didn't find in that marketing missive: specific stock picks. After all, the whole point of marketing the Hidden Gems newsletter, or any newsletter, is to get people to pay to become subscribers, so that they can learn what the recommendations are, right? Right.
If this is true, what are we to think of all of the emails we get that actually reveal the stock pick, with no other commercial offer? You know the kind I'm talking about. It comes with some fancy headline like "Hot Stock Journal Issues Report -- STRONG BUY on XYZ Corp." Why, my friends, are the people at Hot Stock Journal sending me this fantabulous stock pick, with no strings attached? No newsletter to sell, no nothing? Hmmm?
I got one of these emails last week from the Investor Financial Times.These kind folks issued a "strong buy" alert for a company called China World Trade Corp. (CWTD.OB), a bulletin board stock. I did a little checking on China World Trade, which I'll share in a moment, but first let's talk about performance. In early January, its shares traded at $0.50. This morning, they're trading at $8.00. Wow! That's 1,600% in a month.
Incredibly, China World Trade was only $1.00 last Wednesday. Strangely enough, that's when I started getting these "strong buy" alerts in my email. Intrigued, I went back to those emails in my spam box and opened one up. Here's an exerpt of what I saw at the bottom of the email, in teeny-tiny print (I'll make it big for you, and emphasis is mine).
The purpose of this advertisement is to provide publicity for the advertised company, its products or services. Holla Stock Profiles, and affiliates (GS), publishes reports providing information on selected companies that GS believes has investment potential. GS accepts no liability for any loss arising from an investor's reliance on or use of this report. An investment in CWTD is considered to be highly speculative and should not be considered unless a person can afford a complete loss of investment. An affiliate of GS has been hired by the company and compensated fifty thousand free trading shares of common stock by a third party for the publication and circulation of this report. GS intends to sell all or a portion of the CWTD stock at or about the time of publication of this report.
Translation:
We're paid to promote this company. It's a "strong buy," but you should be prepared for total loss. After you read this and get excited about how much money you're going to make, we'll happily sell our shares. Cool?
My favorite line from the fine print is: "Since an affiliate of GS has been compensated there is an inherent conflict of interest." I guess so!
Now, I thought most of us had been trained to ignore these kinds of emails, so my message today may only be a reinforcement of what you already know. But someone is buying this stuff. My guess is widows and orphans who can least afford "complete loss of investment."
What's interesting about the timing of all this is that companies that are hoping to capitalize on the success of the Chinese economy have been doing very well in the past year. There are legitimate market opportunities in the East, and companies such as Intel (NASDAQ:INTC) and Procter & Gamble (NYSE:PG) are trying to capitalize. There are also more speculative yet still legitimate companies in which one can invest, such as Chinese Internet portals Sina (NASDAQ:SINA), Sohu.com (NASDAQ:SOHU), and NetEase.com (NASDAQ:NTES).
So, what about our friends at China World Trade Corp.? Truthfully, I know only what they filed in their 10-K with the SEC, and I thought I'd share a few snippets here. I do encourage you to peruse its filing yourself as a lesson in confusion. I certainly couldn't follow half of what is going on. This company was incorporated in Nevada in 1998, and has changed its name twice since. First, it was Weston International Development, then Txon International Development, and finally China World Trade Corp.
According to the filing, it has engaged in at least three share purchase agreements with three different entities: two British Virgin Islands companies and an individual in Hong Kong. It's all very confusing, but it looks like China World Trade Corp. gave away 75% of its shares to purchase all shares of another company's subsidiary.
So, what does it do? According to the company: "Our business objective is to open and operate business clubs in the major cities of China in association with the World Trade Center Association in order to position ourselves as the platform to facilitate trade between China and the world market."
That's their objective, but they haven't actually done anything yet. Their one location is "under renovations." They also "expect" to open a few clubs in 2005 and "plan" to create an Internet portal. Boy, where have we heard that before?
How about financial statements? The company reports $2.8 million in revenue for fiscal 2003, but only $193,000 of that was actually related to the business it is supposed to be in. Even with the revenue, it reported a $2.2 million loss, on expenses (mostly salary) of $3.9 million.
I don't know if China World Trade Corp. will ever get its business off the ground -- I hope it does -- but there's nothing there right now. So, even in the best-case scenario, it is paying stock promoters to advertise its company in the hopes that there might one day be a profitable business behind the confusing financial statements and business structures. I can't say whether there will be profits at some point down the line, but as of this morning the company has a market cap of over $170 million with only $193,000 in revenue and no real visibility on more.
Those are just the facts. Buyer beware.
David Forrest doesn't own any stocks discussed in this article. The Motley Fool is investors writing for investors.
