Our Ms. Stephanie quoted in Bloomberg....
I hope you don't mind Steph.
Big Bettors Behind Surge in Penny-Ante Shares
May/14/96 17:56
(Editor's note: Taking Stock is a weekly column designed to provide perspective on the U.S. stock
market. It runs on Tuesday.) New York, May 14 (Bloomberg) -- The 24 mechanics at Florida
Power & Light Co. in Miami could have bought a lottery ticket. Instead, they bought about 1 million
shares of Comparator Systems Corp. for less than $50,000, and watched their stake rocket to more
than $1 million in four days. ``We went wild,'' said Terry Thomas, a 35-year-old power plant
worker who talked his friends at the utility into buying the stock more than a year ago after reading
about a patent filing for Comparator's fingerprint identification system. ``I guess I found the needle in
the haystack.'' Thomas's penny stock tale is the type that keeps individual investors coming back to
a market where most stories don't end with profits. Even Comparator gave back much of its
advance, falling to 56 cents a share from as high as $1.88 in two days. Fingerprint ID technology
sparked more than its share of high hopes. From March 3 to March 8, 532 million Comparator
shares changed hands, including 177 million on Tuesday -- an all- time record for any stock. During
that time, 13 blocks of 1 million shares or more changed hands. Trading like that suggests it wasn't
just small-timers chasing Comparator, which has yet to turn an annual profit in its 17 years as a
public company. Hedge funds and money managers were in on the frenzy as well, investors said.
``Everybody was trading this thing,'' said Stephanie Mocilan, an institutional trader who works out of
her home in the Hamptons, on eastern Long Island. ``I picked up (Comparator) for a bunch of
hedge funds on Monday,'' she said. ``I went in and started buying in 20-, 30-, 40-thousand-share
blocks and made close to $150,000 in profits for the clients.'' There was no secret to her trading
style, Mocilan said: ``All I was doing was following the momentum crowd.'' While that kind of
buying power may barely budge the price of a stock like International Business Machines Corp., it
makes a big splash when it shows up in a thinly traded penny stock. In Comparator's case, the
hedge funds only invested for a quick profit, usually less than a day. Retail investors -- like Thomas,
who still owns 11,000 of his original 15,000 shares of Comparator -- are the ones in these tales left
holding shares that fall back in price, or worse, stop trading at all. Such stories are becoming more
common. Mocilan, for example, also recently made bets in Advanced Viral Research Corp. and
Anacomp Inc., two penny share plays. Advanced Viral traded today at 81 cents, down from a high
of 1 29/32 on May 1. Anacomp, a company in Chapter 11 protection from creditors, was at 10
cents, down from 27 cents on May 7. Both are Nasdaq OTC Bulletin Board stocks that saw daily
volume jump above 10 million shares during the past two weeks.
Record Trading
``The most intriguing thing about this is the volume,'' said Charles Payne, editor of Wall Street
Strategies, a newsletter for brokers and traders that specializes in speculative stocks and takeovers.
``You have people playing these things that weren't playing these things a couple of months ago.''
Regulators have taken notice. The Securities and Exchange Commission today suspended trading in
Comparator for the next two weeks, citing concern that the company may have overstated its assets.
That was a follow-up to a National Association of Securities Dealers inquiry that forced Comparator
to ask for a trading halt on Thursday. The stepped-up questioning, as well as a letter sent to NASD
members reminding brokers of their fiduciary obligations to customers, had a chilling effect on penny
share trading. Yesterday, small-cap stocks accounted for 14 percent of Nasdaq trading, down from
36 percent of the Nasdaq total last Tuesday. Stocks must have only $2 million in assets and a million
in market value to trade on the Small Cap Market. Companies with $4 million in assets, among other
qualifications, can trade on the full-size Nasdaq National Market. Comparator trades on the Nasdaq
Small Cap Market. Mocilan said traders are laying low until regulators stop snooping. ``When the
water's cleared, they'll be back into it.''
Reaching Lower
Investors began moving into smaller stocks in a big way earlier this year in search of better returns as
larger stocks stagnated. The Standard & Poor's 500 Index is up 8 percent so far this year. By
contrast, the Russell 2000 index of small companies is up 13 percent. The reason is earnings. Russell
2000 companies are seen by IBES International Inc. as maintaining double-digit earnings growth this
year. For the 454 S&P 500 stocks that have reported first-quarter profits so far, growth was 8.2
percent on a non- weighted average, according to Zacks Investment Research. Given how cheap
shares of many small companies are, and how much upside potential they have, Wall Street is
saying, ``I think this is a safe bet,'' said Steve Chaykowski, a trader at Oakford Corp. Money
managers who work in smaller issues are also benefiting. ``I've never been so busy in terms of
opening accounts,'' said Rob Lutts, who oversees $350 million for Cabot Money Management in
Salem, Massachusetts. Lutts invests in companies ranging in value from $50 million to $1 billion.
Caution Sign
Cabot has invested in some of the most speculative issues, including Iomega Corp., up fourfold this
year, and Presstek Inc., up 66 percent. Iomega rose 1 15/64 to 66 1/64 today. A year ago, it was
at 4 29/64. Presstek, which traded at about 10 two years ago, fell 1/4 to 160 1/4 today. Lutts's
father, Carlton, runs a 25-year-old investment newsletter with a circulation of 20,000. More than
600 of those readers subscribed in the past couple of days. ``It's hopping,'' the junior Lutts said.
While some of Cabot's investors are stock market veterans with as much as a million dollars to
invest, Cabot is also getting money from complete novices. The combination of the two is a warning
sign to Lutts, who said he's only investing about 15 to 20 percent of his new funds. It's a yellow flag
``whenever the money is really thrown at you,'' he said. Lutts sees stocks falling in the next couple
weeks. So do a lot of investors these days -- just not while they're holding the stock.
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