Keeping A Wary Eye On Penny Stocks

Money; 5/1/1999; Reynolds, James E.

Lynn Duke got an e-mail tip in February that a penny-stock company called Webboat.com seemed to have no connection to the Internet other than its name. Duke, chief writer for a Website known as Stock Detective (www.stockdetective.com), was suspicious. Lots of little companies, with or without Internet businesses, have been adding .com to their names to attract online investors. Duke dug up a Webboat.com press release trumpeting its name change from the New York Bagel Exchange. Hmm. Bagels to...boats? The same release crowed about Nasdaq's approval of Webboat's ticker symbol change and compared the company's new name recognition with that of Dell, Amazon.com and eBay. Yeah, right. Duke then went to Webboat's site, where she found nothing except links to a stock quote and the press release, which doesn't even state what the company does. That was enough for her. Webboat.com was put in Stock Detective's Red Light District, its list of "precarious investments."

Penny stocks have long been a bane of securities regulators and a danger for gullible investors. The companies, which sell initial shares for less than $5 (though often they go higher), don't trade on a major exchange, have minimal filing requirements and can be easily pumped up by aggressive promoters. The advent of online investing, with its message boards and day-traders, has made hype creation easier than ever. So Duke and her editor, Kevin Lichtman, the president of Stock Detective's parent company, FinancialWeb.com, have gained a following among penny-stock investors. "When five junky newsletters tell me about a new stock, I go to Stock Detective to see what they say about it," says John O'Reilly, a microcap investor in Bedford, N.H.

But Stock Detective is also worth a look for Duke's writing, which is lively and funny, with sharp insights into how promoters play their games. Consider her take on the pitchmen at a seminar for Wade Cook Financial, the company whose bull-market-guru founder hypes get-rich-now trading "systems." The shills, writes Duke, present themselves as "a walking gallery of 'success stories,' some of whom seem to be operating somewhere between the golly gee of Gomer Pyle and the foppish erudition of Frasier Crane. But what they don't tell their wide-eyed audience about is the rainbow of investigations into Wade Cook's operations." (Cook Financial's latest quarterly Securities and Exchange Commission filing cites investigations by the agency and two states.)

Stock Detective's arrows have been on target. When the SEC announced in October that it was suing 23 stock-promotion companies, 12 had been identified on The List, Stock Detective's directory of small-cap p.r. firms that get paid for their work by the companies they analyze.

As good as Stock Detective is, there are some, well, ironies about it. First, having spent time as a broker and a stock promoter, Lichtman knows the business from the other side. Second, his business plan isn't one to give fundamental investors a lot of confidence. Stock Detective is part of the FinancialWeb portal, or group of sites that offer mutual fund and stock screens, stock quotes and analyst commentary. Lichtman wants FinancialWeb.com to be "the ultimate free investors' Website," backed by advertisers. But it lost more than $800,000 on $95,000 in revenue in the first nine months of last year.

Third, the company began as a penny stock; it's still not traded on an exchange; and it changed its name and added the .com in January. The stock soared from $11 to $27, before settling at $16.50. "We are definitely working in a glass house," admits Lichtman, who holds 18% of the company, or 902,000 shares. But he adds that his business is truly on the Web and that "we don't pay a promoter to tout."

As for Webboat.com, the stock, which spiked up 37[ceents] to $1 after the company's name change, closed at 50[ceents] on March 23. When we caught up with CEO Mark Horne, he told us he was in Phoenix looking for venture capital to launch his "portal to the nautical world."

--James E. Reynolds