Posted by Tom Allinder on Tue, Mar 30, 2010
A few days ago, I was asked some interesting questions by a person I know that works with micro cap companies (OTCBB and Pink Sheets).They detailed the failure of two companies that had substantial “investor awareness” campaigns underway on them. The stated cause of the collapse of these stocks was from shorting.
I asked what sort of awareness programs were being conducted? “The usual, email campaigns,” was the reply… I will come back to the shorting issue but first a few statements on email…
Promotion of micro cap company stocks has pretty much come down to one method and that is: email blasts. Since the 1990s when stock email newsletters became popular, the email blast has become the way in which companies on the OTCBB and Pink Sheets are promoted.
Here are a few points in no particular order on email and its use for stock promotion:
· Email provides immediate results, good or bad. We don’t have to run any expensive metric measurements to see if the email blast worked. The only metric that counts is stock performance that day. How do I know this? This is what all the promoters and company management teams say; I have talked to hundreds of them in the last year.
· Email results are steadily declining because of server side spam arrestors, individuals have spam catchers and many emails simply land in the inbox of people that don’t care about micro cap stocks. I have 5 business email addresses and between them, I get over 2,000 emails a day. Fortunately since implementing server side email anti-spam software, I don’t see most of them. People are buried under email; it’s a saturated market.
· For promoters that rely on email (all of them), refreshing their email lists is getting expensive. I know this because I have talked to several of the big budget emailers. They are now asking me if I have some good lists. Good email lists are costing some of these promoters $20-30 thousand dollars a week. They are still turning good profits though. One big time promoter told me he gets $100K week for a budget and spends $30K in outsourcing and $30K on his own lists, about $10K on news releases and other odd and ends expenses. He still clears $30K a week so it’s not all bad…
· The state of email marketing is of no importance to anyone in the micro caps except those promoters struggling to keep up. Those that do not have a budget to build or buy lists are dying on the vine. For companies and their management teams, they understand email marketing completely. Other methods of promoting their company and stock is not well understood therefore deemed a waste of time and money. In other words, companies and third parties will readily spend $30-100K a week on email marketing than $5,000 a month on optimizing news releases, optimizing their website, doing a PR campaign or anything else that might provide dividends in the future.
· Speaking of the future… Micro cap company management teams, promoters and all the deal-doers are only concerned about today. They have obviously read the book, The Miracle of Mindfulness by Thich Nhat Hanh which teaches the value of living in the moment; in other words be mindful of what you are doing at this moment in time. For micro cap companies, IR people, promoters and what have you, there is only today… this moment. What can we do to raise money right now? An effort to build a company that will perform a month or 6 months on down the line is not a consideration. To most, there is no such thing as the future in the micro cap world. That is why email marketing is the only accepted way of awareness for 99% of the companies traded on the OTCBB and Pink Sheets. Being mindful and living in the moment is great for an individual, but running a company that way is counterproductive.
· Email marketing targets traders. Short term promotion leads to short term shareholders. The entire marketplace on the OTCBB and Pink Sheets is for traders only. Why are there no investors? Isn’t it true that companies are built on the backs of investors? Yes, it is true, investors are needed over a period of time for a company’s business to grow, but we are not interested in selling products or services right now. Let’s sell as much stock as we can now and raise money then we will worry about selling products and services. You see, when you are in the business of selling stock, you don’t have investors. Investors invest in companies because they believe in that company’s products or services. Traders invest for a few minutes or a few hours in stocks. But the reality of the situation is that small companies absolutely have to sell stock to raise money to grow their businesses.
· Many Deal-doers and Investment Banking Firms have no clue as to how to sell stock. As covered in the previous paragraph, it is imperative that these small companies sell stock to raise money to grow their businesses but let’s be real about how all of this is done:
1. There are legitimate companies that are led down a path of destruction by financiers, deal-doers and their IB firms. The only people that make money in these cases are the financiers, deal-doers or their IB firms. The company and its shareholders are victims.
2. There are plenty of companies that have virtual businesses led by professional micro cap people that are there to do one thing and one thing only: Make as much money as they can as fast as they can and move on to the next deal. The shareholders are the ones that get hosed in these cases.
Many of the legitimate IB firms that are trying to build their client companies only know how to sell stock. They never buy any; they sell and sell as long as the demand is there which subsequently eliminates the demand and kills the stock. How many times have you seen what seems to be a good company with great news trade millions and millions of shares of volume and the stock not budge and actually closes in the red for the day? These sellers know the volume is coming and go to the warehouse to get millions of shares to sell.
There is an overall attitude in the micro caps of “make hay while the sun shines”. When volume comes in on a stock, sell, sell, sell because it may not happen again for a few weeks, a few months or longer…
Every once in a while a good deal is put together with a publicly traded company and the stock performs for a few days, a few weeks or even months. Ultimately the selling of too much stock at some point leads to the demise of that company’s stock in the marketplace.
In the 1990s, when I first started studying the market and began to invest and trade stocks, I looked at patterns a lot. I noticed that NYSE, NASDAQ, AMEX companies that performed over time had corrections in their stock prices but the price never went all the way back to where it started. The correction was typically 50% at worst. When I started trading penny stocks, I noticed that in nearly all cases, corrections were 100% and sometimes more. The reason for this was that there was a lot more stock outstanding when the stock arrived months later at its previous base so in many cases, corrections led to new, all-time lows in stock prices. You can bet that in most cases, if a micro cap company’s stock is climbing over days, weeks or months, they are diluting the stock to take advantage of its advance. Again, let’s make hay while the sun shines. The long term investor is the one screwed here.
So finally I now return to the shorting aspect of email marketing. Email marketing by its very nature is well understood and deemed as the only way to promote micro cap company stocks. Don’t you think that those on the short side of the market subscribe to stock newsletters? They know that all big email promotions end shortly after they begin and facilitate an environment that is very favorable to shorting. You have to know that the shorters are rubbing their hands together when they see a big email campaign.
Many of these email campaigns as well as hard mailers sent to mailing lists contain hype, overblown price targets and all sorts of other scammy aspects. This sort of activity is why many investment professionals tell investors to stay clear of penny stocks. The atmosphere of penny stock promotion is that of the wild west or the gold rush days; not very professional in other words.
These big email campaigns give them just what they need: The liquidity to short, be it legal or illegal (actually illegal in most cases). The absence of market makers and being an all ECN market now in the micro caps is a boon to the shorters. Without market makers, there is no orderly market and its nothing but a bunch of traders (many of them ignorant of what they are doing) playing against each other. I can also tell you that the short side of the market also looks for front loaded email campaigns. What do I mean by this?
Many of the big emailers have huge egos and lots of “friends”. Example: They will tell a couple of their buddies that they are “going out” (promote) on XXXX stock on Wednesday morning. They start feeding the symbol out to a few select people on Monday and Tuesday. By their very nature, human beings love to talk and spread secret knowledge. This gives them a sense of self worth and value. So the big emailer’s buddies tell a few more people, they in turn tell more people. By Tuesday at the close, before the campaign has even started, the stock has seen a significant advance and is loaded up with traders getting in “at the bottom”. When the big campaign starts, the stock is advancing on big volume. At exactly the same time, the front loaders are starting to sell into the demand for a nice profit and the shorters are sending their orders in. Given the front loading and a lot of people looking to get out with a nice profit, the shorts selling stock into the demand, the entire process collapses on itself because the supply has now exceeded the demand.
You can see this happen if you use Level 2 Quotes. You will see almost all at once, sell orders start lining up on the offer side. Once this process is underway, those that have stayed in a little too long get desperate and start selling on the bid side. The bid side of the stock evaporates in a matter of seconds as the full blown collapse starts. Who wins here? The shorters and those that got out early are the clear winners. Who loses? The greedy ones and those that bought on the email blast and believed the hype. That is why the big emailers have to refresh and rebuild their lists. Those that get burnt, unsubscribe or mark the sender as junk mail or just delete future emails.
Finally the object of email is liquidity. I have spoken with many micro cap CEOs and other management team members. Most, quite frankly will take good liquidity over moderate volume and price appreciation any day. They are not in the business to make shareholders any money. One CEO told me last year when I was trying to sell him on a longer term approach that would benefit shareholders too, “I don’t give a damn about the f-ing shareholders.”
So, you see, as long as the micro cap market horizon is only one day, the methodology and the results will continue to be the same. However, add in that micro cap stock in itself is getting harder and harder to clear brokerage accounts (for a lot of different reasons), we have a “market” that is collapsing inward.
At some point in the near future, the stock of all micro cap companies will be so hard to clear by third parties (it’s nearly impossible now) that the promotion business will become very limited. It will only be conducted by those micro cap professionals that know how to get stock cleared or find some way around all the hurdles that are growing in height daily.
In many ways the instant gratification mindset that exists in the micro caps will be looked back upon as the seeds of its own destruction. These seeds were sewn back in the 1990s much like the seeds of the real estate market collapse were sewn well before the collapse occurred.
I have been blogging, writing books, making slide presentations, case studies, videos and what have you for the last year and a half addressing newer ways for companies to help themselves and for those in the IR and promotion business to help these micro cap companies.
Here are some of the things I have spoken of so enthusiastically but met with apathy; I might as well been giving talks on continental drift:
Website Optimization: Micro cap companies are not concerned with an optimized website. A mere presence is good enough. A website that draws visitors and engages those visitors is unimportant because it is a longer term strategy. TRADERS DO NOT LOOK AT WEBSITES of companies they are trading; they don’t care what the company does or what products or services the company provides. A website is for investors; investors are not targeted by the companies, IR or their promoters. Why spend $3,000 -$5,000 on a new site when we can hire another emailer for that price?
News Release Optimization: I worked for three weeks building a comprehensive guide on optimizing news releases while saving money at the same time. I spent hundreds of dollars promoting the free white paper on news release optimization. I sent the white paper to many CEOs I know. I only got feedback from one of those CEOs… He said “This is a great resource Tom. It is extremely well written and informative; however… most CEOs are not interested in reading 16 pages on a news release. You need to find a way to condense this down to a page with bullet points.”
Again, silly me for thinking that companies want to have more people to see their news releases…
Never mind the news releases or distribution; when is the emailer going out on our stock?
Bottom Line: If it doesn’t provide results TODAY, then it’s a waste of time and effort. The half hour spent optimizing a news release for greater distribution and maybe syndication on the Internet beyond the financial pages can better be spent on the phone finding another emailer…
Social Media Platforms like Facebook, Twitter: These have proven to be powerful tools for building a business by companies and agencies that know what they are doing. Social Media success depends on a certain methodology. Those running social media platforms must use them to ENGAGE an audience, thereby building a brand following. To date though, nearly all promoters, IR people and micro cap companies that are using social media platforms are using them as BROADCASTING platforms. In other words, they are not engaging others on these platforms, they are pushing a message out. Some of the promotional entities on Facebook merely copy and paste their emails into a message for their “Facebook friends” and send it out. Again, using social media strategies in the proper way is a longer term strategy and does not provide instantaneous results therefore is deemed a waste of time and effort.
The bottom line is that we are all results oriented and we need those results today. At the same time, our only marketing method is becoming harder and harder to do. And, it’s getting harder to get paid by the client companies because their stock won’t clear anywhere.
What are we going to do? Where does salvation lie? We ourselves are responsible for the world we have created. If our world is not such a lovely place anymore then its needs to be us that change it.
Posted by Tom Allinder on Thu, Jan 21, 2010
Every CEO, management team member and shareholder wants to see their stock become the next hot stock. But, here is where my opinion differs from many service providers and management team members in the small and micro cap stock community.
"What do we have to do to get the stock moving?" I hear so often from other IR types, CEOs and others involved with publicly traded companies. When I ask them about their business, more often than not, I get a long pause before any response. In most cases from my experience it seems that company management thinks- Get the stock going and we can get the business going.
The whole reason that investors and traders buy stocks is not because of the stock, but because of what the company behind the stock is doing. We have seen this time and time again: The companies that have stocks that are successful for more than a couple of days has a good story being told. The stock of any company is a reflection of the investing community's perception of that company- not the perception of the stock.
Now, I know you are thinking: We need to raise money from the sales of stock so we can get our business going. This is true, but think about it- If you have no business or your business is weak, why would anyone buy (and hold) the stock? You can do what many companies do- hire a promoter or short-term IR firm to pump the stock for a day or two to raise some money. Once they are done, then what? It becomes an endless cycle of pump, spend and pump again.
There will always be a market for short term promotion of microcap stocks. However, there is also a growing line of thinking that the only way to be really successful for weeks or months or even years, is to have good brand recognition and a great story being told across the Internet. For a company to be successful over time they need to have:
INVESTORS
Traders are great for short-term liquidity; but companies are built on investors; those that buy and hold the stock over a period of months or even years.
Strategy
Most microcap companies have no strategy at all for intermediate or long term success. Most of the management teams live in an instant gratification world. Instant gratification you may have noticed has caused a lot of trouble over the last 10 years or so.
Developing a strategy for 3 months, 6 months or a year or more is the only way to start to build a story that will lead to a successful company and stock. What should be strategized?
Web Site
It is my honest belief that many company management teams, not just of public companies but private as well think that just having a web presence is good enough; as if an online business card is sufficient. I have ran close to 500 company websites through HubSpot's Website Grader and the average score is still about 45 (out of a possible 100). You need a website that can be found, engage visitors and encourage people to communicate and interact with your company.
News Releases
I have written about news releases to the point of having no fingerprints left and still, most ignore the findings of HubSpot as well as my own research. There is a technique to writing news releases to ensure a maximum chance of syndication in as many places as possible.
The Story
Many stocks have had good runs because they had a "catchy and engaging" website and because they had a steady stream of good news. There is also no doubt that these companies thought their strategy out well and then executed on it. But also, the companies developments were being talked about not just on the message boards but in blogs, on Twitter and many other social media platforms.
The bottom line is that without some sort of intermediate and long term thinking and strategy with the proper help, you may keep doing what you have always done and keep getting what you always got...