There's a reason we caution investors to stay away from the pennies with a penchant for PR. But rarely do we get such a vivid illustration of what can happen to those who dance with the devil. All you readers who cry "foul" when I turn my hairy eyeball onto rank speculations like Altair Nanotechnologies (NASDAQ:ALTI), Ipix (NASDAQ:IPIX), GlobeTel (AMEX:GTE), Mace Security International (NASDAQ:MACE), and Law Enforcement Associates (AMEX:AID), say hello to Host America (NASDAQ:CAFE).
Host has produced only one profitable year since 1998. Over its more recent history, it's decided to get into the energy conservation and management biz, and that's how it recently attracted momo players galore.
The reason? On July 12, it announced a limited deal with Wal-Mart (NYSE:WMT), and with management prodding, everyone assumed that it would lead to very great things. The stock zipped from $4.25 to $6.35. And it went on to do even more, cresting $16 a share within a week.
Over that period, investors were encouraged to believe the hot story by a barrage of PR and coverage from paid stock-pumping sites like Digital Wall Street.
But the market's unseemly schemers weren't the only ones whipping up the froth. No, the more mainstream press even got into the act, publishing articles -- like this one -- complete with healthy doses of self-interested analyst pumping.
How great was this story? You tell me. The major shareholders started dumping immediately. On the day of the announcement, with the stock up in the mid $6s, director and officer Rossomando Gilbert shed 10% of his shares, but that was nothing. Director Peter Sarmanian dropped his stake from 60,000 shares to 20,500. On July 18, with stubs trading at $13.85, Roger D. Lockhart, who held almost 10% of the company's shares, sold nearly his entire stake of common stock, dumping 392,330 shares.
Then the hammer fell. On July 20, the SEC said "Let's have a look at what's going on here." On July 22, it suspended trading in Host's stock. It hasn't resumed since. On August 5, the Nasdaq told the firm that the stock would be delisted unless the firm requested a hearing, which it vowed to do. Class action filings are piling on, and even the shorts betting against this thing are stuck, telling stories of margins calls and other financial burdens even though the stock isn't trading.
No matter how bad it looks, it remains to be seen whether or not anything illegal -- or even just plain sleazy --was going on here. But for anyone interested in the market's most volatile bottle rockets, this should prove a point. If it sounds too good to be true, it probably is. And it might be worse than you can imagine.
For related Foolishness:
- History repeats at Altair.
- Peel another layer off the stun-gun onion.
- Investors who bet on this so-called security play got hosed down.
Seth Jayson thinks the real next big thing will not likely be announced via paid press release, nor be accompanied by heavy insider selling. At the time of publication, he had no positions in any firm mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
