Write about stocks and it doesn't take long to figure out where the whiners place their bets. You can dish all the dirt you want about a company like Ford (NYSE:F), Microsoft (NASDAQ:MSFT), or Boeing (NYSE:BA) and you'll rarely hear a peep. But mention Apple (NASDAQ:AAPL) without burning enough wax in Saint Steve's honor, and the Mac horde will bombard your inbox for weeks. But as vociferous as they are, most of them can string together a paragraph without swearing, complete with punctuation.
Not so the penny stocksters. Flip over their favorite rock to show them what kind of stuff is crawling underneath, and you can expect all kinds of inbox atrocities.
In addition to copious anger and amusing misspellings, these missives are uncannily similar with a pervasive victimization complex. After reviewing dozens of them, it's easy to spot the formula. I present it below, for future correspondents' ease.
How to defend your penny stock:
- Decry the conspiracy. ("Your just short!, Your long there competiter," etc.)
- Issue vague threats of personal or cosmic reprisal. (Lawsuits, SEC action, bodily injury, wrath of God, etc.)
- Refuse to dispute or even acknowledge the facts presented in the analysis.
- Attempt to shift the blame for a stock's drop in market price (if any) to those who reported the story, rather than those who perpetrated it, i.e. management.
- Evoke the penny company's grand future, without supporting the valuation with any operating metrics.
- Plead for the writer to "stop picking on" the "little guy."
- Complain that what was written "isn't journalism."
Oddly enough, it's not just the penny stock investors who engage in this comic self-destructive exercise in self-denial. Sometimes, it's the penny-stock company itself. Last week, I pointed out how Taser (NASDAQ:TASR) wanna-be Law Enforcement Associates (OTCBB: LENF) has gone to great lengths to defend against some inconvenient facts unearthed by Chris Byron at the New York Post.
Stinger takes a swinger
Earlier this week, I got my own version of the penny-stock defense, when Stinger Systems (Pink Sheets: STIY) circled the wagons and issued a press release that was clearly aimed at my analysis of its CEO, Robert Gruder. The long version of that story is here.
The short version is this: Mr. Gruder is a financier who has run more than one company directly into the ground, while making some poorly disclosed and personally lucrative deals along the way. He purchased Stinger's main assets for $250,000 cash plus a $200,000 IOU only a few months back. A few press releases later, and investors are being duped into paying between $300 million and $500 million for the company, which still has no profits, boasts trailing sales of only $200,000, and puts its future hopes in a stun gun prototype.
It must have been a slow news day in North Carolina, because the Charlotte Business Journal published a story titled "Stinger Challenges Motley Fool Allegations."
Actually, Stinger challenged nothing. Furthermore, I should point out that these are not allegations; they are facts, supported by reams of publicly available documents. (If Stinger wants to dispute these facts, there's a handy little email link at the bottom of this page. I invite it to clarify the record.)
What Stinger did was follow several of the seven steps. Some of the juicy tidbits: Stinger COO Roy Cuny called the article "unfortunate and irresponsible," decried my "so-called journalism," reiterated Stinger's intention to be a "leader in the non-lethal market," and claimed that the board was mulling "possible action" in response to the article. What Stinger did not do was justify its bloated valuation or address those serious questions about Gruder's track record at Alydaar Software and Information Architects. In fact, the press release didn't mention Gruder at all, except to name him as a media contact at the very bottom of the page, in itsy-bitsy letters.
Gruder waves goodbye
Today, Stinger did something even more interesting. Gruder decided to abdicate his position as CEO entirely. Coincidence? Or a victory for so-called journalism? Whichever, please note that this is foremost a cosmetic switch -- justified by the age-old bogus management excuse "family time." After only four months heading this profitless wonder, Gruder needs a time out? Does anyone else out there wonder what other horrors must be lurking in the shadows if Gruder swept himself under the rug after mere weeks at the helm? That, my friends, looks desperate with a capital D.
Will things be any better with Cuny, an ex Smith & Wesson Holding Company (AMEX:SWB) executive, as Stinger's fresh public face?
Stinger's new front man
The Smith & Wesson moniker may give Cuny street cred, but a bit of digging shows that his record is a mixed bag for the average investor. The press release touting his hiring mentions big revenue gains and impressive-sounding increases in operating profits. Take them with a grain of salt. After all, the SEC is investigating Smith & Wesson's financials from the very periods cited by that Stinger press release, to see whether Smith & Wesson "violated the federal securities laws in connection with matters relating to the restatement of our consolidated financial results for fiscal 2002 and the first three quarters of fiscal 2003," periods when Cuny was the top manager.
If you can trust Smith & Wesson's filings, much of the revenue gain was the result of the dissolution of a long-standing boycott by gun buyers who were angry that the firm had signed a deal with the devil, Bill Clinton. The gun press credits director and former president Robert Scott with doing the heavy lifting that accomplished the turnaround.
One thing is certain. Under Cuny's tenure, Smith and Wesson has had a lackluster payoff for investors. And he got what looks like a pretty rich paycheck for a company that booked $1.4 million in net earnings in 2004. His take-home pay that year came to over half that net, including an amazing $353,000 for "relocation and temporary living expenses." Must have been some rental. Not so shareholder-friendly.
He was also at the helm when the company appointed a convicted armed felon to chair its board. Yeah, sort of a clumsy maneuver. The final fly in the pie is the sudden, completely unexplained breakup between Cuny and S&W back in November, 2004. Was he fired? Good luck finding out. At the time, the firm said only "Roy C. Cuny, until today the President and Chief Executive Officer of the Company, is no longer with the Company." I'll tell you this, folks: When they don't even bother to cite the traditional "personal reasons," it means there was no love lost. We may never know the truth. Legal settlements seem to have gagged the discussion.
Even allowing for the likelihood that Cuny is a decent manager -- and it looks to me like he may be -- keep a couple of things in mind. At Smith & Wesson, he was the second head janitor, there to clean up a mess. That's a different task than leading a charge into a market dominated by a single, proven competitor. Also, remember that at Stinger, Gruder still controls the majority of the shares, so he's ultimately the one calling the shots, and in the past, his leadership has meant giant losses for shareholders.
Remember, it wasn't just a lack of profits that killed investors at Alydaar and Information Architects, it was also a loss of trust resulting from the consistent transfer of company wealth from shareholders to insiders. If you want to see what investors think of Gruder and what Gruder thinks of investors ("...cowards hiding behind the chat boards..."), I urge you to review this excellent piece in the Charlotte Business Journal. After doing so, ask yourself: How much of your money do you want to hand this guy for $200,000 in trailing sales and an unproven prototype?
"How dare you! A journalist would never say something like that!"
Exactly.
That is the very essence of what makes us different here at The Motley Fool. Yes, we discuss the news, but we are most certainly not "journalists." I've been in the journalism game, kids, and if you think it's clean, I have some penny stocks to sell you. At the Fool, we are investors, communicating with other interested investors.
What's the difference? Financial journalists are those folks who regurgitate press releases for you, as if you couldn't read them yourselves. Journalists are the folks who spend their mornings trying to come up with a snazzy way to justify the day's action in the market, even though it hasn't happened yet.
"Stocks to get opening boost from Google (NASDAQ:GOOG)." You won't read that kind of ridiculous fluff here.
We concentrate on individual companies and what their particulars mean for your portfolios. We don't aim to be objective. We don't try to agree. We don't even aim to be right all the time. We aim to help Jane odd-lot think for herself. We're here to point out the many sharks waiting out there in that vast investing ocean. We hope it's fun and informative. But sometimes, it means tough love.
That's why, when other so-called journalists are doing the golf clap for the CEO of that hot new stun-gun latecomer, Fools are impertinent enough to ask why in the heck investors should be expected to pay him $450 million for a limping manufacturer he picked up for $450,000 a few weeks back. When journalists are jawboning for their meaningless sound bite, a Fool will dig through the CEO's past corporate failures looking for the real evidence of the executive's ethics and execution.
So, when this Fool comes across a CEO with a track record for sweet insider deals and years of shareholder carnage, you bet he's going to tell you that the guy's new company does not deserve your investment dollar. If the CEO transfers his title to someone else and suggests you "pay no attention to the man behind the curtain," heck, I might even suggest you short it. Pretend you're making odds at the track: Where's the smart money on a three-time loser?
Suggestions for Stinger
I can understand that the folks at Stinger might not like my opinion, but as we used to say on the playground, "Tough nuggies." I'm not writing for them. I'm not interested in their feelings. I'm interested in saving bucks for regular guys like Keith C., who wrote, "Thank you so much for your information about Stinger!!! I had committed a small amount of funds (in the 40s) but got out after reading your article. I love The Motley Fool. You guys give proper insight to a very confusing world of investing."
To get back to Stinger, and Cuny's vague promises of board "action" in response to my article. I say, keep bringing it on! Putting Gruder at arms' length may be a start, but how about following up with some straight talk, the kind of things you seem to have left out of the last few sunny press releases.
- Why should investors trust Stinger now, given that Gruder is still the controlling shareholder and his track record as a steward of shareholder money is abysmal?
- If you don't agree that investors should evaluate your firm in accordance with its top executives' past performance, how should investors approach it?
- Why did Gruder issue such a low float for the company, given the potential for such dangerous volatility?
- On January 3, Stinger placed "up to $17.5 million" worth of common stock and warrants with private investors, registering it for resale. Were any of Mr. Gruder's shares part of this placement? How many total shares did this represent, and are there any restrictions on when these investors can begin selling their stakes?
- Gag order, shmag order. What were the circumstances of Cuny's abrupt departure from Smith & Wesson back in November? Throw us a bone here. What are the terms of his compensation package at Stinger?
- When will Stinger's stun gun be ready for shipment? Has the firm received any advance orders for the product?
- What are Stinger's goals for sales and profitability?
- How will Stinger establish the safety of its weapon, given the concerns over Taser?
If Stinger can answer these questions with real candor, then investors will have a better idea of how to judge the company's investment potential. If, as I suspect, the public will be treated to nothing but the same old platitudes, hang onto your wallets. Don't get suckered by the PR surrounding any impending arrival of the "product." Don't bet on "billion-dollar potential" and promises of "leadership."
It's your money, Fool. Before you hand it over to executives with troubled pasts, demand real answers. Demand real sales and real profitability -- or a credible road map to get there. Stinger may swear that it's a leader in the less-lethal market, but if you buy this company at the wrong price -- which looks like anything above a few cents per share -- your portfolio may never survive the shock.
For related Foolishness:
- The PE (Public Enemy) said it best: Don't believe the hype.
- Want a better way to get zapped?
- Stay away from Stinger's scary CEO.
- The buzz at Taser can be scary.
Seth Jayson thinks investors should watch their wallets, and companies should produce more products than press releases. At the time of publication, he owned an S&W Sigma pistol, but had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here. Taser is a Motley Fool Rule Breakers pick.
