by John Jagerson | January 2, 2014 9:52 am
I was 16 years old in the 1980s and, like many teenage boys, I felt that I was old enough to take care of myself and wanted to go out on an adventure. I left home and moved to Hawaii to work on a pineapple plantation where I lived with other workers in an old converted hospice. My goal was to earn a high wage, save my money, complete my high school credits via mail-order from a college on the mainland and enjoy the “good life.”
I won’t say how many of those goals I actually achieved but I returned later to go to college a lot wiser and humbler for my 10-plus hours per day in the sun “picking pine.” During my time working on the plantation, I befriended a fellow who worked in corporate finance for the same company, and I became very interested in the ins and outs of managerial finance. I suppose this is one of the big reasons I do what I do now.
I have since followed the stock prices of the company I worked for, Maui Land and Pineapple (MLP), with great interest. It’s not that it was a good company (it isn’t) but it is a great example of what to do – and not do – during a financial crisis. For decades, MLP had struggled, lost money, borrowed more debt and sold assets as it lost market share and floundered strategically. When the global recession and oil spike hit in 2008, the company’s operations were nearly crushed. Since then, the company has been attempting a turn-around.
MLP phased out its agricultural operations completely in 2009 and has since been trying to become profitable in tourism and real-estate development. It has been unsuccessful in its efforts so far. Ironically, the rickety old hospice I called home in the ‘80s was sold by the company in 2009 and is now a fully-renovated and successful resort owned by Xorin Balbes. MLP is a company with a lot of land-assets but limited experience in their current business model.
This is all interesting (at least to me) but there are plenty of unsuccessful public companies. Why does MLP matter this week? The company popped up on my radar again after the NYSE requested it to comment on “unusual trading activity” in its stock prices. Without any news, the stock’s price has risen from $4.29 to $6.93 per share during a couple weeks. Most of those gains have been in the last few days.
The NYSE asks companies to comment on price spikes like this because it smells like confidential information has leaked. If a company is looking at a new product release, joint venture, or acquisition, a fairly large team of people have to be involved. It isn’t uncommon for one or more of these people to say something they shouldn’t and for traders to act on that information. This is all illegal, of course, but it happens.
This kind of market manipulation happens among small, unprofitable firms more than others. And it is even more common among small firms from China, and other developing economies where market manipulation is a little easier to get away with. There is often a trader behind the spike who is trying to ramp the price just enough to get other traders interested and then will sell quickly at the high.
Most firms (including MLP) will issue a press release in response to the NYSE’s request that basically says, “Management has a policy not to comment on unusual trading activity.” This strange back and forth between a company’s management and the NYSE is weird but actually fairly common. I took a survey of the companies that have issued a press release like that this year and all but one essentially said “no comment.”
The question at this point is whether it is likely that something really is going on behind the scenes. If inside information has leaked, it might justify a price of $7 a share or maybe even much more. The stats, however, tell a very disappointing story for momentum traders. It is extremely unlikely for a stock in this situation to actually release new information that justifies the new price. It basically boils down to market manipulation and/or run-away speculation.
Among that same list of stocks that issued a press release regarding unusual activity this year, only two closed higher for the year compared to the high price that triggered the NYSE’s demand in the first place. That is a disturbing stat considering the bullish market we have enjoyed so far. It is very common to see the press release essentially trigger a selling frenzy. There are no-doubt some short traders who use this as an opportunity to profit from the normal price decline, which tends to push the stock lower even faster.
Note: Check out Reliance Steel & Aluminum (RS), China Gengsheng Minerals (CHGS), China Distance Education Holdings Limited (DL), Oxford Resource Partners, L.P. (OXF), Taomee Holdings Ltd. (TAOM) and Ampio Pharmaceuticals (AMPE) as just a few stocks during the last two quarters to issue these kinds of press releases and see if you can spot the “unusual activity” that concerned the NYSE.
This is a slow week in the market so we didn’t want to recommend a new long position until we see how traders feel when they come back from the holiday. Shorting MLP could be a profitable trade and based on recent history the odds seem strongly in favor of a rapid decline in January.
For traders with a very high risk tolerance, we think this falls into the “fun” trade category like our recent bearish recommendation on Star Scientific (STSI). These situations happen along once in a while and, while they might not all work out, those that do can be very productive.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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