Do some quick research to check out claims in e-mail from 'analysts'
November 19, 2001
If you're like me, you probably get lots of e-mail from people you've never met advising you to buy stocks you've never heard of. These missives read like research reports from professional stock market analysts profiling companies that have just developed exciting products or services with huge market potential.
However, I've often found that doing even the most basic research paints a different picture. For instance, I recently came across an e-mail message with "Analyst Alert" as the subject. Upon opening the e-mail, I saw the heading: "Research Report (for) Power Technology Inc." from "The Investor Online."
The Investor Online, the e-mail explained, is "a new financial service striving to find investment opportunities."
The online investor adviser said "each recommendation is extensively researched" and would save me hours of research. .
OPPORTUNITY KNOCKS: Investor Online described how Power Technology is developing a superior battery for the automotive and electric car industries.
The firm is concurrently developing a device to detect the presence of water in storage and fuel tanks. In addition, it says it is working on a microwave device to dry grain before storing and is designing equipment to join large diameter pipes together using a magnetic technology.
Investor Online said it expects Power Technology's earnings to grow from a loss of 11 cents per share this year to a profit of 89 cents in 2005. Based on these forecasts, Investor Online targets a $1.80 per share stock price by the end of next year and around $18 by the end of 2005. Given the fact the stock traded at 45 cents on Friday, that amounts to a tidy 3,600 percent gain in four years. .
SHOESTRING OPERATION: Obviously, Power Technology must employ a huge staff of research scientists and technicians to manage the development of all these impressive products.
According to the company's most recent quarterly report and its latest annual report, here's the real miracle: Power Technology is doing the whole job with only 10 full-time and two part-time employees, toiling away in a 5, 000-square-foot facility that it's renting for $2,000 per month.
I'm not sure how Power Technology is paying even that meager staff since, as of July 31, it had only $8,000 in the bank and its debts far exceeded its assets.
With an empty bank account, Power Technology had better be cranking up sales. But that's not happening. Power Technology's total sales last year were a flat zero. Indeed, it hasn't reported any sales since the five-month period that ended June 30, 1998, when it posted $1,663 in sales.
I suppose that it's theoretically possible for Power Technology and its shareholders to hit the jackpot with one of their projects. However, most companies developing products as sophisticated as Power Technology's spend tens of millions of dollars and employ staffs of thousands.
How did Investor Online manage to goof so badly? What about all that careful research that Investor Online promised in its introduction? Reading the disclaimer at the end of the report revealed that Power Technology paid Investor Online to prepare and mail the report, in this case, 100,000 shares of Power Technology stock. It's legal for Investor Online to promote Power Technology and to get paid for it, as long as it reveals the payments in the document and discloses that Power Technology, in truth, supplied the material for the report. .
DO YOUR OWN RESEARCH: Here are simple checks you can run to verify the stories reported "analysts" such as Investor Online.
You can find everything you need on Yahoo's Profile page at finance.yahoo. com. Get there by requesting a quote and then selecting Profile under "More Info." Scroll past the top section containing the business summary to Statistics at a Glance, consisting of a variety of sub-sections.
Each subsection contains several useful data items, but I'll describe only what you need to spotlight a company such as Power Technology that is unlikely to make good on the promises described.
PRICE AND VOLUME. Many professional investors shun stocks trading at prices below $1, so Power Technology's recent price of 45 cents flunks.
SHARE-RELATED ITEMS. Larger companies are considered safer investments than smaller companies, and those with market-caps below $100 million or so are considered too risky by many investors. Power Technology's $11 million market-cap would easily disqualify it in this category.
VALUATION RATIOS. Price/book is the appropriate value gauge when a company has neither sales nor earnings. Price/book ratios range from below 1.0 for value-priced companies to 20 or so for fast-growing startups. Avoid companies with ratios exceeding 25. Power Technology flunks because its book value is negative.
INCOME STATEMENTS. Most companies worth considering rack up annual sales exceeding $50 million, so avoid companies below that level. As mentioned, Power Technology's sales totaled zero in the past four quarters.
FINANCIAL STRENGTH. Current ratio, a comparison of a company's assets such as cash, inventories and accounts receivables, to its current debts, is a good measure of a company's financial condition. Current ratios higher than 1. 0 mean a company's current assets exceed its current obligations, and values below 1.0 signal problems. For instance, a current ratio of 0.5 means a company's current assets only amount to half of its current debt. Power Technology's ratio is 0.3.
If you want to know more about a company, check out its latest quarterly and annual reports at on Free Edgar (www.freeedgar.com). That's where I learned about Power Technology's staff of 10 and its $2,000-per-month headquarters.
These guidelines will help you avoid the most flagrant over-
promoted stories; however, there's much more to consider before deciding to invest. We'll describe additional considerations in future columns.
Harry Domash lives in Aptos (Santa Cruz County), teaches investing classes and publishes the Winning Investing newsletter. You can read his columns at www.winninginvesting.com or contact him at firstname.lastname@example.org.
By HARRY DOMASH. Copyright © 2001 San Francisco Chronicle Page E - 4