Speculation in Small Companies Ominous: Taking Stock
10/21/97 16:33
East Rutherford, New Jersey, Oct. 21 (Bloomberg) -- United
Energy Corp. more than doubled so far this month.
Best of luck to anyone trying to find out why. Last year,
the East Rutherford, New Jersey-based company said it filed a
patent on a product to unclog oil wells. A few companies have
tested it, but there's been no word on whether the patent was
approved. United Energy hasn't said anything public since
February.
Mining through Securities and Exchange Commission filings
for reports on United Energy gets you nothing. The company
chooses not to publish any details; it's not required to as an
OTC Bulletin Board-listed stock.
Wall Street analysts all but ignore this rocket, which rose
11/16 to 6 5/16 in trading of 173,800 shares today. The gain in
United Energy probably has little to do with the company, anyway.
It has more to do with investors' increasing appetite for
risk. Such speculation pops up from time to time, usually after
big advances in small-company stocks -- like last quarter's 15
percent surge in the benchmark Russell 2000 index. Veterans see
the action as ominous.
''When the public is speculating that aggressively, it's a
sign to get out,'' said Mark Boutote, an independent floor broker
on the New York Stock Exchange. He has followed his own advice --
sort of, selling almost all his holdings this year, from Motorola
Inc. and Texas Instruments Inc. to J.C. Penney Co. and Avon
Products Inc.
Yet Boutote, 41, said he couldn't resist hanging on to one
bet on a smaller stock. On a tip, he bought EA Industries Inc., a
West Long Branch, New Jersey, contract electronics manufacturer
that had $81.6 million in sales last year. At 7 today, EA is up
160 percent since July.
Energetic
Other investors are lured by tiny companies, especially in
the energy business.
On Friday, Oct. 10, and Monday, Oct. 13, Ballard Power
Systems Inc., a Canadian maker of alternative fuel sources,
surged 22, or 46 percent, to 69 3/8. The rally was sparked by a
New York Times profile in which a Goepel, Shields & Partners
analyst forecast Ballard shares could reach 200 in a decade.
The following day, Nesbitt Burns, an investment firm,
cautioned that Ballard's revenue and profitability won't come
until the next millennium, if at all. The British Columbia
company's shares then tumbled 26 percent.
Many speculators chase penny stocks looking for a big return
in percentage terms. Ponder Industries Inc., which rents oil
field tools, doubled to $1 in two-day trading of 15 million
shares on Oct. 6 and Oct. 7.
XCL Ltd., whose hopes lie in developing oil in China, rose
50 percent to a 52-week high of 3/4 on Oct. 7. Trading topped 16
million shares that day and the one that followed.
As for United Energy, whose stock peaked at 8 on Oct. 15,
Ronald Wilen, its president, didn't return telephone calls.
Oilex Inc., a small Texas oil driller, published the last
bit of news regarding United Energy. It said on April 4 it would
use United Energy's KH-30 compound. Now it says it has stopped
using the product because of high costs.
McCabe's Gauge
One measure of speculation -- the ratio of trading on the
Nasdaq Stock Market to that of the NYSE -- is at its highest more
than a year, according to Dick McCabe, chief market strategist at
Merrill Lynch & Co.
Portions of the Nasdaq market have lower listing standards
than the NYSE, though all of its member companies must meet
certain asset or profit minimums, unlike on the OTC Bulletin
Board.
Nasdaq's SmallCap Market, which has lower listing standards
than its National Market, has drawn an increasing share of the
total Nasdaq volume so far in October. It's averaging 10 percent
of total trades, up from 8.7 percent for all of September.
McCabe said the heightened activity is typical of the
excessive optimism found in aging bull markets. The current
rally, using the big-stock Dow Jones Industrial Average as a
gauge, has doubled prices in three years. Other than some small
gains in the Dow in coming months, McCabe sees the rally all but
finished until the second half of next year.
''People have this new-era thinking that the market can
never go down again, but you can get periodic 20 percent
interruptions,'' he said. ''That could be a risk for 1998.''
The last time McCabe's ratio of Nasdaq versus NYSE trading
was at this high a level was in May 1996, a month notorious for a
surge in questionable penny stocks, including Comparator Systems
Corp.
Comparator, which said it had a cheap machine that could
approve credit card transactions by reading fingerprints, briefly
sported a $1 billion market capitalization before its financial
statements were discredited. It's now valued at about $5 million.
Milestones
May 22 of that year marked an almost four-month top for the
big stocks comprising the Dow industrials. The following day,
SyQuest Technology Inc., a troubled maker of high-capacity disk
drives plunged 60 percent on dashed takeover rumors.
James Cramer, who runs his own hedge fund, has said that
SyQuest's drop was the start of a drought in small stocks.
Similarly large losses by risky stocks could make individual
investors gun-shy of the whole market again.
''If there's one place that the public is in that there's no
protection, it's the Bulletin Board,'' said Gary Kaplowitz, a
head trader at Fahnestock & Co. in New York, who often bets
against OTC-listed companies. ''That's where the public is going
get smashed. That's where the money's going to be lost, I really
believe that.''
Still, speculation is rife throughout the market. Proof:
SyQuest, which is listed on Nasdaq's National Market, is being
run up again. The shares are up 35 percent this month to 4 5/8.
After raising $159 million in the past 15 months, including $30
million of convertible warrants in September, SyQuest said it
could turn a profit in the current fiscal year, which started
last month.
H.D. Brous analyst Howard Rosencrans, the only brokerage
analyst to follow SyQuest, told investors on Oct. 10 that the
Fremont, California-based company is a ''speculative buy.''
--Roger Madoff in the New York newsroom, with reporting by Philip
Boroff and David Zielenziger (212) 318-2315/dp/ltk
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