It boggles the mind. Don't argue about fundamentals; there aren't any. In fact, if anything, what we see here is a result of a management that isn't paying a lick of attention.
Flamemaster (NASDAQ:FAME), which normally averages trading volume in the hundreds, saw its shares jump as much as 90%, or $30 per share, after it announced a 7:1 split. This, for a company that started the day with a $6 million market capitalization and minimal business. The split must be the sign that things are really going well, huh?
Not likely. Flamemaster's recent history is strange, and today's action makes it all the stranger. In September the company filed with regulators to delist its shares, citing the financial and managerial burden of maintaining compliance with SEC strictures. A month later Flamemaster announced that it had scuttled plans to deregister, that it was selling off its legacy fire-retardant coatings business and would then be merged with the Best Candy Company, which would receive 90% of the combined company. Soon after, Flamemaster executed a 1:10 reverse split.
Stunning as it seems, that a company would go in the course of a month from wanting to deregister to gutting itself and converting into a shell, these moves may not have been well-conceived. The Nasdaq market has minimum standards for companies being listed, among them a requirement that there be 500,000 publicly available shares. After the reverse split, Flamemaster had only a little more than 70,000 shares available for the public, so Nasdaq quickly swooped in to delist the company.
A 7:1 split puts the company at 500,000 on the nose. There's no business reason for the split, no wish to make the stock more affordable for shareholders (a pretty bad rationale for splits anyway). The reason the company is undergoing this split is to rescue its merger with Best Candy Company, which has among its conditions the continued listing of Flamemaster stock.
Seems like a pretty good reason to get excited about a company, right? The only reason I could think that this would be good news is that the folks running Flamemaster might have had some diabolically Machiavellian plan all along to create a great deal of interest and buzz about its merger. If that were the case, then they succeeded in spades with today's stock action. Somehow, though, I doubt this was the case. People running to the stock on today's announcement are almost guaranteed to find out the hard way that things going up on specious reasons are almost certain to come down just as quickly.
See also "Taking Advantage of the Terminally Stupid."
Bill Mann doesn't own Flamemaster shares. We hope this is patently obvious.
