THE MOTLEY FOOL - "IS SYQUEST HIDING FROM INVESTORS?"
Though many academics still dispute the claim, markets are inefficient. Stock prices can gyrate wildly, and these swings sometimes bear little relation to underlying change in a company's business or the general economic conditions.
Uncertainty persists, in part, because any attempt to value an enterprise is inherently subjective, dependent upon a host of assumptions and comparisons that others may not agree with. Still, markets would tend to be rather dull if that's all there was to it.
Ultimately, market inefficiencies follow from the uneven flow of information. The quality and timeliness of information certainly influence basic valuation models. But information can have even more dramatic effects. To the degree that value is nothing but perception, information---whether accurate or not---can itself drive markets.
The offline media's preoccupation with online "hype" essentially points rather obsessively to this legitimate concern. After all, anyone can enter America Online's THE MOTLEY FOOL or any other online investment bulletin board and tell whatever story they want about the next would-be highflyer. And as in most things, tipsters don't need to be honest or correct; they just need to be persuasive.
On the other hand, one might ask: So what? How is such misinformation, sheer gossip, or "one man's opinion" that much different from what constantly sweeps through the exchanges? How is it any different from what you find daily in Dan Dorfman's regular reports on CNBC or THE WALL STREET JOURNAL's Heard on the Street column?
The far more interesting question---one never raised by the offline media---is whether the new online world has begun to change the flow of information so that the individual investor, in some cases, may actually be better informed than Wall Street or the conventional media that do the Street's bidding. Though the playing field is not yet level, and the online world may be creating new types of market inefficiencies, the fact is that we're already seeing signs of astonishing changes that place the individual online investor squarely within the information loop.
Consider this week's amazing story surrounding the stock of Syquest Technology (SYQT), a company that sells removable storage products that compete directly with Iomega's much-discussed Zip drive.
At 3:20 PM on Wednesday, June 5th, Reuters carried this news: "Nasdaq said Syquest Technology Inc is out of compliance with its listing requirements since its net tangible assets fell below the $1.0 million rule as of March 31."
That lead may sound arcane, but its effect was not. Literally within minutes, the company lost nearly half its market value, dropping in price from around $13 a share to $7.5 a share before recovering slightly thereafter. In a nutshell, the wire report meant that Syquest risked being delisted from the primary Nasdaq exchange because, on paper, the company looked nearly worthless.
Significantly, the story was not *initiated* by Reuters, CNBC, THE WALL STREET JOURNAL, or, for that matter, even the Nasdaq exchange itself. Rather, individual investor Art Brothers (AOL screen name Artbros) instigated the coverage. Moreover, the real time play-by-play could be followed in the Syquest folder in THE MOTLEY FOOL.
On Wednesday, at 4:17 am ET, Artbros began the immediate sequence of events with a post headed "Re: Delisting a factor?" He said that on Friday, he had contacted Nasdaq where an official there told him the exchange reviews company financial statements in-house to make sure they comply with SEC regulations. The official said that when a company is out of compliance, Nasdaq sends it a letter of warning directing company officials to explain within 10 days how they intend to bring the company back into compliance.
Artbros asked specifically about Syquest. The official went to check his files."When he came back to the phone," Artbros wrote, "he told me he couldn't comment on the specifics of this situation, and went on to lump Syquest with 'other problem companies' like Comparator. (Trading halted a couple of weeks ago.) . . . Now, it is critical to understand that he said nothing specific about SYQT. But as we talked, his tone of voice, the comparisons he made, and his generally sympathetic demeanor all spoke volumes."
Perhaps even more telling, this Nasdaq official knew the analyst working on Syquest and said he would check to see if the agency had sent Syquest a warning letter. According to Artbros, the official "came back and said he couldn't comment. But by this Fool's lights, something was happening." The Nasdaq official referred Artbros to the SEC. Artbros concluded his post with this thought: "SYQT's probable delisting would make an interesting article for submission to a wire-service. Anyone affiliated with the wire services out there?"
Later the same day, at 1:02 pm, Artbros was back online, thanking other readers for giving him names of media contacts. "If you know of any other contacts affiliated with any of the wire services, drop me a line. Let's try and get the message out. Perhaps it will cause some of the brokers recommending this stock to take a long sharp breath, read the financials, call their clients and start unloading the poor schmuks who bought into it on a hope and a prayer." He concluded: "Incite sanity."
Two hours later, at 3:06 pm, Artbros offered an update. "I just spoke with the LA office of Reuters. Asked if they were following the Syquest developments, and wondered why they hadn't writen anything about the possible de-listing of Syquest from the NASDAQ. They asked what was up. I explained. . . . Don't know if it will go anywhere. But into the roiling maw of Reuters it was cast."
"Hey, if you see a fire," he said, "you should report it, right?"
Events were now moving more quickly than anyone could have imagined. Just fifteen minutes later, MF Parlay posted this to the Syquest folder in THE MOTLEY FOOL: "OH my gawd. . . . Reuter's just picked up the possible delisting we have been speculating about here. I'm speechless!"
Others chimed in. At 3:33 pm, MF Trees posted a note titled "SYQT plunging," reporting that "CNBC says SYQT down to 9 1/2. Down over 3 1/2 in less than 10 minutes."
Minutes later, at 3:35 pm, Parlay was back with this update: "The drop is happening right NOW. I show it at 9 1/8 and falling FAST. I still can't believe that this is happening. . . .Where is my Foolish hat????"
As the wire report circulated and triggered panic, everyone risked getting the story wrong. At one point amidst the stock's freefall, CNBC's Ron Insana simply said that Syquest had been delisted.
Amidst similar frenzy in the Syquest folder, Rselavy stepped in at 3:45 pm with "NOT DELISTED yet," a post reiterating what Artbros had mentioned in his original note less than twelve hours earlier: "My understanding is that it has NOT been delisted (*yet*). According to my broker just a minute ago, NASDAQ has only issued a *warning* and SYQT does have a certain amount of time to demonstrate how they might fall into compliance."
Still, at the market's close, Dale Velk posted thoughts to Artbros that would be echoed again and again: "You Da Man!" One active short seller in the folder later thanked Artbros, boasting that the afternoon's events had made him half a million dollars.
Without a doubt, Artbros' intervention made the difference in getting the story out. He talked to the Reuters office in Los Angeles which in turn passed the story to its New York office, where a reporter called Marc Beauchamp at Nasdaq and confirmed the facts.
Oddly, though, the facts themselves were nearly stale. Beauchamp confirmed that Nasdaq had issued Syquest the official letter of warning *two weeks* earlier.
This revelation is significant. Two weeks earlier, Syquest rose from 4 3/4 to 18 3/4 on takeover speculation fueled, in part, by San Francisco CHRONICLE columnist Herb Greenberg. That same week, company officials made three announcements to the press, including one on Friday. None mentioned that the company had received a letter of warning from Nasdaq
To the extent that such a warning may materially affect the company, company officials may have breached their fiduciary duties by failing to disclose it, almost certainly opening themselves up to a fifth shareholder lawsuit.
During this period of time, much of the offline media was concentrated on the supposed online hype driving the shares of Syquest competitor Iomega. Almost no stories focused any critical attention on Syquest until the company's new Chief Financial Officer cooled the takeover rumors that Thursday evening, sending the stock down to around $9 a share in the next two days.
Still, the stock had risen again earlier this week, reaching a high of $16 a share after a wave of relatively positive news about the introduction of Syquest's new EZFlyer, a removable drive with greater capacity than Iomega's Zip drive.
Despite the fact that Syquest was a no-show at the important Comdex computer trade show in Chicago, Reuters put a positive spin on the new product launch. Its report led with the views of Dataquest's chief analyst Phil Devin who said that "this new product should be the anchor for this company's return to solid profitability and growth."
The verdict is still out on Syquest. The stock has stabilized around $10 a share as investors realize that delisting apparently is not imminent. And as Devin says, the new EZFlyer may save the company. Still, most investors trafficking through THE MOTLEY FOOL's Syquest and Iomega folders seem more than skeptical, and so far, their information has proved to be the best around.
Though Artbros' initiative instigated the Reuters piece, the groundwork had been laid by the many individual investors who had gone over Syquest's earnings report in detail weeks earlier and came to the startling conclusion that the company's results were likely even worse than stated. Moreover, Syquest's troubles had been predicted a year ealier by other Foolish investors who had discovered Iomega and then publicly tracked both companies in an extraordinary daily record composed of perhaps 40,000 individual posts.
Some may be concerned that as short sellers, Artbros and others in the Fool folders stood to gain financially from the news release. But Foolish investors were in a position to make so much money shorting Syquest because their information was way ahead of the curve. Artbros was just trying to get the offline media and the market up to speed.
The Reuters reporter had the good sense to inquire about Artbros' position in the stock; yet the reporter had no reason to ignore Artbros' extensive support for his claims.
Ultimately, the most troubling issue here is why the Nasdaq itself doesn't issue a public notice when a company is threatened with delisting. In the case of Syquest, such a public announcement two weeks ago would have helped thousands of unFoolish individual investors avoid a company that seems to be in far more financial trouble than they likely understood.
Surprisingly, Nasdaq's Beauchamp said that *every year* 1,500 to 2,000 Nasdaq companies "routinely fall out of compliance" with board requirements. The agency issued no public notice regarding Syquest because it is "not an exceptional case," he said.
Since most of these companies now do find a way to get their house in order and meet the exchange's requirements, one might suggest that Nasdaq would only add to market instability by making these warnings public knowledge. Stock prices would surely fall on the news, and that itself might be enough to scare off the suppliers and lenders that such companies typically rely on to see them through troubled periods. Perhaps ignorance actually serves the long-term interests of some investors.
On the other hand, announcing such warnings would at least force companies to respond publicly about their plans and give everyone a chance to determine if there's significant cause for concern. Ultimately, the companies themselves would be better served, since the shareholders who stuck around would be likely to weather the temporary storm if they understood the company's plans.
What makes Syquest unusual, then, is simply the quality of the public attention given the company by individual investors in THE MOTLEY FOOL. Until Nasdaq changes its reporting practices or the offline financial media improves significantly, such online investors may have found a way to continue to take advantage of the market inefficiencies fostered by the uneven flow of information surrounding 6-8 stocks every trading day.
I wonder if Reuters, the rest of the mainstream media, or even Wall Street itself is ready for that?
-- Louis Corrigan (RgeSeymour)
[EDITOR'S NOTE: For more on the clash between the offline and online worlds, go to keyword: Rogue and check out the pieces on Iomega in the listbox on the Rogue Politics screen. Keyword: Rogue.] |
