Friday, September 29, 2006

What Goes Up, Must Come Down

This very simple statement of the law of gravity applies to the stock markets as well. It is the principal that allows investors to execute on Investing Principal Number One: Buy Low, Sell High.

What if an investor is unwilling to wait for the natural forces, i.e. fundamental developments, to propel a stock price upward on strong performance or to revalue the stock when prospects turn sour?

Wall Street has seen every increasing level of market manipulation by investors using e-mail campaigns and chat room postings to sway public viewpoint on stocks in favor of which ever position they have taken. Indeed, there is some suggestion that the same parties could engage in tactics to drive a stock price in both directions one after the other, taking positions in advance of the moves.

Pegasus Wireless Corporation trading for the present on the Nasdaq under the symbol PGWC, has experienced its share of gravitational forces. As I mentioned in the post “Short-sale Side-step,” Pegasus shares climbed rapidly to a high of $18.99 in May 2006 and then fell to a low of $0.61 on September 28, 2006. The stock price movement appears to be disconnected to reported results, hinting that there is more to the Pegasus price move than can be explained by the last 10Q filing.

Even a cursory review of Pegasus’ circumstances suggests there is fertile ground for an investor or a group of investors to manipulate this stock.

  1. Sexy products with a large market opportunity and the potential to challenge incumbent players make for great story telling in the trading room.
  2. Hotly contested technology race punctuated by patent application and product introduction events provides fuel for hyping and/or trashing in chat room and press venues.
  3. The management team has a controversial history and is executing on what I can only describe as mercurial investor relations policies. The almost bizarre capitalization strategies involve stock splits, warrant awards to certificate holders, and a private placement with the CEO.
  4. PGWC is an unseasoned security having traded four years in the Over-the-Counter market until April 2006 when the stock was accepted onto the Nasdaq National Market System.
  5. The stock has no formal research coverage and practically no institutional ownership, meaning that few financial sophisticates are watching the stock or discussing it in professional circles.

So what is a company supposed to do to minimize stock shenanigans? As a research analyst it should not be surprising to that I would suggest sponsoring research if none is otherwise forthcoming. Research coverage is not going to make up for fundamental short-comings or clumsy investor communications, but it certainly brings a reasoned voice to the discussion. There might be any number of legitimate reasons for the movements in PGWC share price. Only a in-depth investigation by an objective analyst is going to report them dispassionately.

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