Most investors are taught to assume that markets are efficient and that investment decisions are made in an honest and professional manner. In fact, none of the major finance textbooks (think CFA and MBA here) cover things like pools, pump and dumps, affinity fraud, market manipulation, marking the tape, front running, cooking the books, etc… in an in depth and exhaustive manner.
Many times, investor ignorance costs the general public dearly. At www.hedgephone.com our main goal is to help investors steer clear of investment scams and pump and dump companies. We have learned the hard way that fraud in corporate America is an ever-present, ever-persistent problem.
Netflix (NFLX) investors learned the hard way about investment pools (loose agreements between big money traders to manipulate a stock). We believe that Netlflix was indeed a massive pump and dump (whether this was criminal or simply chaotic randomness) orchestrated by management, institutional investors, the media, and other interested parties whether they were actively manipulating the stock or not.
In our view, corporate insiders decided to go for a stock bubble valuation by juicing cash flow in the short term, moving toward an internet only “revolutionary” business model, and getting Jim Cramer to relentlessly pump the stock via Mad Money. The team is confirmed by interlinking director members from TheStreet.com, Netflix, etc… and from huge insider sales near the top of the bubble. If Cramer and company liked the stock so much, why were the corporate insiders who knew the business better than anyone else dumping shares like there was no tomorrow? In my view, this was simply a case of insiders dumping into the pumping whether they believed the hype or not. As a professional investor and part time fellow journalist, I was astounded to see nothing but positive articles (except of course from other authors at Seeking Alpha….) on the company from the likes of TheFool, The Street.com, Investors.com, etc.. etc… right before the implosion. We were extremely bearish. Not that it makes us special but it means that this was predictable (if we got it right, the big money managers from Harvard Business School certainly should have!).
The onslaught of BS in the financial media led to Netflix being priced at $300 per share and for over 100X what in hind sight look to be questionable earnings because they were later erased by huge losses. While most people simply believe the action in Netflix was based on a rational, efficient markets we think the stock traded the way it did because of speculation, media hype, and some old fashion stock promotion. Many authors argued that developments within the company caused the stock crash, but we think the action of the name was more typical of a micro-cap stock promotion. The fact that thestreet.com was so positive on Netflix while sharing board of director members with Netflix seems like a pretty obvious conflict of interest to me — nothing criminal, mind you, just a little bit slick.
At Hedgephone.com, we aren’t here to tattle on people but to educate them. We are looking for the next pool ready to blow up and we don’t think Netflix was the last organized pumped up and over-hyped stock to burn the little guy… Here is a quick and dirty list of companies we are investigating currently and why we think they are more hot air than hot stock at current valuations.
Angie’s List (ANGI) — We started covering ANGI at $15.50 a share and so far this short has been a nice winner similar to our call to short Groupon at $22 a share. Angie’s List reported dismal earnings last week as the company managed to lose another $14MM in the last quarter. Sure, revenues were up big but paying for business only makes sense for start up web companies right now because there is a bubble in these names created by massive economic stimulus and mal-investment (think 1999). Without this bubble, ANGI should probably be worth around 1X sales or about $150MM — a full 80% drop from current levels. The balance sheet looks sketchy, the bottom line is blood red, and even though web traffic is up the stock looks like a great short at today’s prices.
Linkedin (LNKD) — While this is clearly a great company, the stock is not a great investment in the classic Ben Graham 1934 Security Analysis sense of the term. LinkedIn is a bubble stock trading for 900X earnings. There is no rational explanation for this other than it is a repeat of the 1990′s technology bubble. While I wouldn’t short LNKD, I do think that investors should try starting their own web company versus investing in this clearly overpriced security.
Salesforce.com (CRM) — While cloud computing is a “revolution” in innovation, we don’t think that the market valuation for CRM is a real one. In fact, we think Salesforce is another “pool” manipulated by the big guns in the trading world. We also think the current technology bubble is so important to the Federal government that fraud charges will never be levied on any of the major manipulators or bubble company executives in the future even though these crimes are clear and identifiable. You see, we have created a culture of fraud on Wall Street and Main Street loses every time. That’s just the way it is — expect Saleforce.com to “beat” earnings and ramp a little higher before ultimately blowing up sometime in the next year or two.
YELP (YELP) — Yelp is a lot like Angie’s List because it is clearly just an eyeball and mouse-click valuation. The company lacks earnings, cash flow, book value, etc… but the market loves anything with a dot com at the end of it’s name. Yelp is one of the worst investments I can remember at this price but like all internet businesses anything can happen and the company may eventually grow into this astronomical valuation.