Independent Research

As the Chief Executive of a successful New York-based investor relations firm, I am besieged with phone calls from independent research firms that would like to publish research reports about our clients. I usually receive quotes of $25000-$50,000 for these reports. For ten years now, I haven't been able to figure out the value of these literary pieces. They're not really research reports, they're literary pieces.

When approached, I always react the same way, "If you can convince me that you have a following and that the research report is more than just a fluff piece for the pr package, I'm willing to listen."

This is not to say that these companies are not legitimate organizations, I just hesitate identifying their work as research reports. Whenever I read one of these things, I look for 2 things that allow me to quickly determine what value I would attach to one of these reports in doing my own research about a public company. First of all, is there any contact information on the report. I am looking for a company, phone number and name of analyst. If this information isn't available, I look no further. If it's available, then I contact the analyst. Let's just say, for example that the company's main product is serial cards. I will make up a question. Something like, "What about Dell?" If the response is something like, "I didn't know Dell makes serial cards", then you know your obviously dealing with someone that has no real knowledge of the company's market. If the analyst replies by saying, "Dell doesn't make serial cards", can you see why this analyst would have much more credibility. It's an easy thing to do and I highly advise it. If the company is working on a drug for rheumatoid arthritis, I'll say something like, "What about Merck's product?" If the analyst says, "I didn't know Merck has a product", then that research report isn't worth the paper it's printed on. Maybe 2 points in the round file (garbage folks) but that's about it.

It is very important that I mention the following. About a year ago, I visited with Taglich Brothers with one of my clients. After presenting to the person that we met with, the guy said to us that he would gladly produce a report but he couldn't assure a buy rating or even a hold on the stock. In fact, he said, "We just don't take your money and for a fee, give you a buy rating." My client was insulted but I was extremely impressed. I would say that Taglich Brothers is one of the few credible equity research organizations in the marketplace that produce research reports for a fee. Their buy ratings, in my opinion, are not just rubber stamps.

Mark Cuban Speaks

After spending almost 20 years around the financial markets and almost all of my adult life, I have to say that I have never read an article that so eloquently, accurately and so simply summarizes Wall Street. Here is the link :

http://www.blogmaverick.com/entry/2252572946170125/

I highly advise reading it. Several years ago, I was managing some money for a CEO of a NASDAQ company. This company had buy ratings from several major investment banks in the country. After meeting with my client in the Silicon Valley, he proceeded to give me a presentation about his company that was very technical. I joked with him that I really understood the story and we laughed.

After asking him if the analysts understood the story, he replied, "You probably understand it better than them." He was talking in particular about an analyst from a major investment bank.

Cuban points out:

Part of the process of taking a new company public is something called a road show. The road show is just that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds - anyone who can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations. We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it Stockapalooza.

Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.

Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.

The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted 1.000. Every single investor we talked to placed the maximum order allowable for the stock.

How does this relate to small cap stocks? One of the things that you should take from Cuban's post is that stocks rarely trade on fundamentals. Their valuations are based on supply and demand. So the next time you're in a penny stock that has made a big move to your advantage, assume that the move was based on increased demand which doesn't really mean that business fundamentals for that company are any better.

Once again, read the article. It is Five Star Entertainment

OTCBB and Pink Sheet News

As a housekeeping note, there seems to be a tremendous void in the marketplace for a place for investors to visit for a summary of all news releases for OTCBB and Pink Sheet Companies.

We are currently engaged in constructing a new section for this site so that you can see a daily summary for all OTCBB and Pink Sheet News. Look for this section to be completed in the next few weeks.

Penny Stock Recommendations

Over the past few years, there has been a litany of newsletters popping up throughout North America touting penny stocks that could rice 1000% over the next year. This post is meant to protect you, the reader of http://www.smallcapstocksblog.com/

Many of these newsletters are distributed through junk faxes and unauthorized emails. Here is a simple rule that you should really think about. What reputable organization distributes a stock recommendation with no contact information for the advisor? That coupled with no website is a recipe for investment disaster. Stay clear of all penny stock advisory services that distribute a stock tout without any contact information.

NOBO List - Important Information - Remove Yourself Now !

If you own stock that is held with a brokerage firm, your stock is held in street name. Street name is the name given to securities held in the name of a brokerage. Registered shareholders are individuals or institutions that have physical possession of their shares. Typically, street name beneficial owners are not identifiable. However, a public company may be able to identify a portion of the “street name” population by obtaining a listing of Non-Objecting Beneficial Owners (“NOBO” list).

Issuers request a "NOBO" List from ADP, a NYSE public company that has signed contracts with many of the brokerage firms in North America to send proxy materials to shareholders. Many small cap companies work with scandalous stock promoters that regularly request these "NOBO" lists to see who owns the stock. Would you want someone seeing your bank account? Then, you shouldn't want to give someone the ability to know how many shares you own of a given security. It is simply nobody's business except your own.

We have good news for you. Becoming an Objecting Beneficial Owner ("OBO") is easy. Being an Objecting Beneficial Owner simply means that the next time a query is placed to ADP by the public company, your name will not be on the list. This will not affect your ability to receive proxy materials. It simply means that your position in the security will be guarded information. Simply, contact your broker and tell them that you would like to become an OBO. Chances are that the broker does not do it often unless he has other customers who read Small Cap Stocks Blog. The great news is that the paperwork is simple and will take all of about 60 seconds to complete.

Most institutions are OBO's. You should be one also.

A Big Red Flag - The Popular is not Popular at this Blog

In the investment world, we must learn how to play defense. Just like any good sports team, a good investor has an offensive mode without forgetting about defense.

By nature, I'm a very positive person. However, I'm always searching for red flags in a company that would tell me to stay away.

Two years ago, I was researching a company and I saw that they issued an announcement about the effectiveness of one of their drugs for Severe Acute Respiratory Syndrome (SARS). It was about the same time that SARS began to become prevalent in the media, the new hot story on CNN. I researched the company's SEC filings and there was no other reference to SARS in the company's SEC filings. I would bet that company didn't even have a strain of the SARS virus to test their drug and yet they were stating that their drug could be effective. That type of claim was about as credible as me saying that I could play shortstop for the New York Yankees. There was simply no solid basis for that claim.

Over the past 6 months, we've seen a few companies participating in the Bird Flu Olympics. I would stay away from those companies.

Look out for an announcement from a company to announce that their technology could have saved the miners in West Virginia. Then, run and don't stop.

The Best Investment Lesson

This is an old story that I like to tell several times a year. Throughout my career on Wall Street, I've been fortunate to meet some folks that have provided me with a million dollar education. Once again, if you heard this story, please forgive me. Read on.

One day, a man approaches an innocent bystander and asks, "Would you like to buy a can of tuna fish?"

The person perplexed as to why someone would approach him with the proposition to buy a can of tuna fish replies, "How much?" After being told that the can of tuna fish is $4.00, he replies, "That's crazy, I can buy a can for $0.89 in the local supermarket."

After some persuasion and after being told that this is the best can of tuna fish he would ever eat, he buys the can.

After holding the can for a few weeks, the second man decides to employ the same tactic. He finds a consumer and after hesitating for a few moments, he asks, "Would you like to buy a can of tuna fish?" The man asks how much and he replies, "$8 dollars."

The consumer replies, "That's ridiculous. Tuna fish is less than $1.00 a can."

But by using the almost exact pitch that he had heard just a few weeks earlier, he is able to sell the can for $8 or a 100 percent profit in about three weeks.

The third man holds the can for a few days and inexplicably decides that he doesn't want the can of tuna. He approaches someone at the local store and whispers, "Would you like to buy this can of tuna?"

The middle aged woman who he approached asks, "How much?"

In a voice that can be barely heard, he says, "$16 dollars."

The woman, laughing uncontrollably replies, "That is the most foolish thing I have ever heard in my life." She states that the price is 16 times the going rate for a can of tuna.

The man, convinced that the woman should buy says, "Maam, I'm telling you this is great tuna. Just buy it!!"

After hesitating for a few moments, the woman buys the can of tuna.

A few days later, the third man is approached by a crazed, irate woman. The same woman that he had sold the can of tuna fish to only days earlier.

"You ripped me off!!" she screams. "You ripped me off!!"

"Hold on, what happened?"

She screams, " I bought that can of tuna and ate it and it was an ordinary can of tuna. I want my money back."

The man, not believing the mistake the woman had made says, "Lady, it's not my fault. You have to understand, there are 2 types of tuna. Real tuna and trading tuna. It's not my fault that you thought that you had real tuna. I never said that."

And so, the lesson was learned.
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Because, most of the stocks that we buy are trading fish. Don't ever believe that you have the real thing until you are really sure. We trade trading fish and we consume and hold on to the real thing. Just ask Mr. Buffett. He never sells his fish.

SEC Public Reference is an Important Number

Almost all of us have invested in a company that has completed a registration for additional stock. SEC filings such as SB-2 and an S-3 are examples of registrations. In most cases, the stock that is linked to that registration has been or will be purchased at a discount to the market price of the stock.

Typically, a stock registration will be effective about 3-4 months after the registration statement was filed with the United States Securities and Exchange Commission. Unfortunately, this is just an estimate and there are many things that can affect the timeframe such as missing information on the registration statement. Additional information requests by the SEC to the issuer (the public company) and the general SEC workload could also affect the time that is takes for a registration statement to be effective.

I would make it my business to have the SEC Public Reference in my list of important numbers and here's why. Can you think of any more important information to an investor than to know when the stock that was sold at a significant discount to the market will be eligible for sale? If a stock now is $1.00 and the stock was sold at $0.40, don't you think that there will be pressure on the stock when that stock is eligible for resale? For small cap stock investors, this can be the difference between success and failure.

Here's how it works and FYI, it's free. Just go to any site on the internet that lists SEC filings. If the company that you invested in has filed an SB-2 (typical for small companies), then I would begin calling the SEC number to find out if that registration statement is effective. Effective means that it is now registered stock, the registration statement has been accepted by the SEC and most importantly, the stock is now eligible for sale. Just give the file number for that registration statement to the SEC representative and tell them that you want to know if it is effective.. If it is, watch for pressure on the stock. OK?

And the number is ……………………………… (202) 942-8090

CEOs of Multiple Companies

I work about 50 hours a week and when I get home at night, I'm exhausted.

I always admire these people that can be CEO of 2, 3 and possibly even 5 companies. In fact, I admire these people so much that I always invest in their companies. Of course, I'm being facetious. I stay away. I never invest in these companies. I run, run, run. Can I make it any clearer?

How the (*&*&& ) can anyone have the time to run four companies. In the future, I would suggest to visit a site that allows you to search SEC filings by name. If the same person is CEO of multiple companies, I would suggest to be careful.

Just like many of our other posts, a little time spent complying with our suggestion and a few cents may save you thousands.

Sincerely,

CEO of One Company

Message Boards on Small Caps

The Ten Commandments of Message Boards

Are the message boards for small caps valuable? The answer is absolutely? However, it is imperative that you manage your time effectively. Otherwise, you'll find yourself without a job.

Here are my rules regarding message boards.

1. I completely ignore all stock price predictions. My predictions are as good as theirs.

2. I completely ignore any references to charts. You can't chart illiquid or very volatile low priced stocks.

3. I completely ignore people that bash other posters. If you have the time to do that, you're either a child or you have no money.

4. I completely ignore all people that post messages such as "Big News is Coming". I question the wisdom of anyone who posts something of that nature on a public message board.

5. I completely ignore the people that can't spell. Spelling isn't related to investment knowledge but I'll take my chances on my intuition.

6. I completely ignore anyone that posts more than 3 messages in a given day. Get a job!!!!

6. I pay close attention to anyone that says that they spoke to the CEO or CFO. Then, I call the CEO. I love to invest in stocks of small cap companies in which the CEO is willing to talk to shareholders.

7. I pay close attention to anyone that references the technology or science that seems to know what they're talking about. Of course, trust but verify.

8. I pay close attention to anyone that tells me something that I don't want to hear but may save me money. I'm not always right.

9. I pay close attention to anyone that references any scientific or technological sources away from that message board that directly pertain to my investment. It tells me that they're really doing they're homework.

10. Most importantly, trust but verify.