From: Linda (firstname.lastname@example.org)
Date: Fri Jul 21 2000 - 20:48:36 PDT
Though I'm usually unimpressed by Cramer's writings, this
article is quite good. Some hints suggesting that a stock
is in trouble, from someone who has probably learned from
Dr. Cramer's Guide to Spotting 'Unpriced
Securities', Part 1
By James J. Cramer
7/21/00 11:15 AM ET
When we first started TheStreet.com I ran a trading
school online. I did a dozen pieces about how to become
a better trader. I want to reprise some of the best of
that now because, unlike then, we actually have a
few readers! The most important piece I did involved how
to take a loss like a man. I think I would have written
a man or a woman now, but that's colloquial, so, what can
you do? So here I go with a contemporary look at the
problem of losses, something that is in vogue now more
than ever, given the stunning decline in the dot-coms.
Have you ever ridden a stock to zero? When I say
zero I am not talking about goose eggs. That would be too
painful for brokerage houses to inflict upon their
clients. Instead, you've probably ridden it down to
an asterisk or the words "no price." Or "cannot be found."
These are all brokerage euphemisms for worthless,
as plain as passing for dead.
It doesn't feel good. It is not something you want
to experience more than once. It is embarrassing. And,
most important, it is avoidable.
What would you have done to be able to salvage some
portion of that investment? What would you do to be able
to get out with something, when it was at least
moderately good, or at least not terribly bad or,
Well, you have come to the right place. I am about
to give you Dr. Cramer's handy six-point pathology guide
to spotting "unpriced securities" before they end up in the
The first sign that you may have merchandise on your
sheets that is not coming back to life would be when the
broker who suggested it to you doesn't mention it
when you call in for a rundown. Or when the analyst
at the brokerage house who recommended it dropped coverage
-- especially if the firm underwrote the stock. I
see this stuff happening all the time now in the
It is like the company was never brought public.
Brokerage houses rarely fumble balls like this, unless
the ball is meant to be dropped. Take that as an early
warning that the stock is ailing. It is much easier
to drop coverage than to tell the truth, which may be
that the company might not make,it. Unlike a headline which
says "Merrill upgrades Amazon," you will never see
word that coverage has been dropped. You will have to
sleuth around to know the truth. The dropping of coverage
is done deftly and quietly to avoid the horrible
embarrassment and stigma that comes with the process.
Second, any time you read that your stock is in
violation of loan covenants, don't read any further.
Every firm that is recommending the stock will say that the
violations will be cured and the company will not
default. Do not believe them. Every one of my disappearing
securities was highly confident that the balance
sheet could be rectified before we were blown to
kingdom come. Only a handful made it, and they never
compensated for the losers.
Most of the time my getting no money back was a key
feature of the ability of the entity to stay alive. That's
because my equity was crunched so that others, debtors,
could take control of the company. I can't tell you how many
times I have been lied to by CEOs telling me that the
language about loan covenants is just boilerplate and
that I was wrong to worry. People who say these things
tend to be judgment proof and they have nothing to lose.
They won't be worth a plugged nickel when things are through
so what do they have to lose?
Company execs never want to have to reveal they are
in violation. If there is a deal to be crafted that
will allow that language not to be used, it will be crafted.
But if it can't be crafted and you get this language on a
quarterly earnings report, take what you can, even if it
is a dollar. It won't be there a few months from now.
Third, any time the company announces a restructuring that
will cram the common or issue a dramatically new measure
of common, perhaps through a convertible security, you should
immediately wake up and smell the formaldehyde. You are
dead. This stuff amounts to the company losing its own destiny.
The management that you have dealt with is probably not even
making the decision to create the stock. Someone more
important to the company now is pulling the strings. It is
most likely the senior lender. He is ordering the
dilution and management isn't even in a position to fight
What are the telltale signs of this betrayal? Usually it is
in the form of a convertible bond with interest rates much
higher than the current on the run 30-year bond and
the right to be able to own at least 10% of the company.
When you see one of these done privately, meaning issuer
to private group, you can kiss your asset goodbye. Get out
before the buying entity begins to short the stock to
oblivion to hedge the entity risk and pick up the dividend.
I had this happen to me three years ago and I am still
reeling from it. Management insisted it was good news
when he wheeled in the big horse full of Trojans. I believed
him. I could have sold at $4. Instead I got asterisked.
I won't let this happen to you.
Check back later today for Part 2.
Fourth, when you see an over-the-counter stock
suddenly dip from five to say, three, without any
volume or trades occurring, that's someone smarter
than you bailing. Do not average down when the big
seller exits, which happens invariably after one of these
moves-down. I have averaged down on perhaps four to
five dozen of these over the course of the past 20 years,
and I never did anything but pay the last high price
ever paid before the company sank into oblivion.
Behind the scenes, someone has gotten the call that
the company is going to be history and he is liquidating
whatever he can. There is no volume for a few points
because he is not willing to bag his trusted Nasdaq
friend. He is saying, "Listen, get yourself in shape
because I want to sell you a piece of merchandise I
think is going to zero. I am willing to take a couple of
bucks." Immediately, the over-the-counter traders go and
hit out all of the bids that are available and get
short the stock. He then tries to do the print at a
low price where he is confident that he can make money
offering a bargain piece of business on anything that he
wasn't short. The temptation to average appreciably
lower is almost irresistible. I am urging you to resist.
This merchandise is never coming back.
Fifth, when you see a stock do a reverse split
because it has gone so low, it's a sign of total
desperation on management's part. I will bet you any
amount of money that the next big piece of news from this
company is bad and the cosmetics of a reverse split were
only done to ensnare you to buy more. Don't fall prey to
this stupid device. It is the ultimate red flag.
Finally, you know that you are headed for asterisk
land when you see insider selling of a stock in the
$3-$4 range after it has traded much higher. If the
company is really about to turn, don't you think the
insiders would see it and snap it up? Don't you think
that they would be buying and not selling, if only to
keep the creditors, not to mention the shark-skinned
lawyers at bay?
I am sure that something that will end up an asterisk
will slip through this six-point net. But I am also
sure that you ignore these six points at your own peril.
Don't be dissuaded by the little dollar amount you might get
back. It is many times better than nothing! And certainly
don't trust a management that has gotten you into a
jam covered by these six. Believe me, you don't want
to listen to that person, let along put your financial
faith in him. He is unworthy of your trust.
Move on before it is too late and there is nothing
to sell and the price is "not available." It just ain't
worth it to calculate the asterisks.
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