A Richard Schmidt Pump Job
Every week I get several flyers in the mail alerting me to what is supposedly going to be the next biggest stock in the world. All of these flyers look alike. There's a picture of a newsletter writer on the front along with a paragraph or two about how he is one of the best analysts or money managers on the planet. Then they'll have some information about some new company whose stock is going to soar.
Sitting in front of me as I write this is one such flyer titled "HOMERUN Stock Alert", profiling newsletter writer Richard Schmidt. It say he was "named by Forbes as one of the best money managers." Inside is information on ordering his newsletter and a collection of booklets he has authored with titles such as Fallen Angels: Former Flyers that Will Soar Once More, How to Double Your Money With Regulatory Stock, and Dream Stocks.
The flyer tells us that Richard Schmidt think this is going to be a great year for the market. Some of the the things he is predicting:
"Interest rates will remain low, with the federal funds rate hovering between 1,95% and 2.75% - on par with the 2.45% rate that was in effect at the end of 1955."
"Unemployment will drop throughout 2004, reaching a level comparable to the 4.2% rate that prevailed in December of both 1955 and 1956."
"Interest rates will remain low." (He seems sure about this one.)
Schmidt says "if you want to take advantage of the highly profitable opportunities in the months ahead, huge gains will fly out of the volatility we're seeing now."
If you order something you'll get "My #1 Stock Pick for 2004-2005 sent absolutely free! It's an in-depth report on TriMedia(OTCBB: TMEG) and why it should be in your portfolio as soon as possible."
That's really the point of the whole flyer. The cover says in bold words the Trimedia stock is "going to soar to $15 or more in the coming months." You "could see a whopping home run gain of 800%! Turn a $5,000 investment into $45,000 within 18 to 24 months."
After taking a closer look at the flyer I found a disclaimer written in very tiny print tucked inside. Richard Schmidt was paid to recommend the stock in "compensation associated with distribution to possible new subscribers including printing and postage in the amount of $198,950; paid for by Fenmore Consultants, Ltd. as an effort to build investor awareness to Trimedia Entertainment Group."
It doesn't take a genius to figure out that Trimedia is a stock promotion outfit. I get at least a half dozen flyers just like this one every week and they all have a similar disclaimer and all of them are promoting a penny stock, most of which have no earnings at all.
I decided to take a closer look at Trimedia's SEC filings and discovered that they are burning cash and piling up debt like mad. Their annual report states that it "will require both short-term financing for operations and long-term capital to fund our expected growth. We have no existing lines of credit and have not established any definitive sources for additional financing. Based on our current operating plan, we will not have enough cash to meet our anticipated cash requirements through January 31, 2005 if we do not raise at least $7,500,000 from the sale of our securities or other financing means."
On January 26 the company had only 28 stockholders. It's main source of financing has come from a hedge fund, the $23.7 million Trident Growth Fund, which has loaned out $250,000 to the company and owns a basket of warrants and stocks purchased in private placements. Founders Equity Securities also has warrants to buy 100,000 shares of stock. I don't know this, but if I had to guess I'd say that the Trident Growth Fund had something to do with paying for the "HomeRun Stock Alert" promotion piece. It isn't uncommon for hedge funds in the penny stock world to buy into private placements and then work to actively promote the stock through such means.
Stocks like this are simple pyramid schemes. If you buy into them you are relying on the greater fool theory of investing - that the promoters will find someone to buy at a higher price than you. If you get in early enough in the promotion, you can make money riding the stock, but if you get in late in the game you'll end up losing your shirt. Unfortunately, by the time these flyers are sent out the promotion is usually over.
And indeed it looks like it is over for TMEG stock. On January 15 the Trident Growth Fund registered to sell 166,788 shares of stock and an entity called TMEG Investors, LLC registered 267,927 shares for sale on April 15th. When the insiders dump the game is almost always up and the chart of TMEG looks like a top has been put in. On Friday the stock closed below 1.60 support. It should head down to $1.00. It's a screaming short. |
