CHUCK JAFFE
Looking for today's big winner?
Mamma.com looks like another bubble baby
By Chuck Jaffe, CBS MarketWatch.com
Last Update: 12:32 AM ET March 5, 2004
BOSTON (CBS.MW) -- There are a lot of ways investors can first hear about a stock, but few spark their interest like being "today's big winner" in market reports.
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The media loves having a new story to tell, so new stocks that have dramatic spikes and interesting histories can get a lot of glory if they have a performance pop.
But chances are that by the time investors hear about that pop, they're too late to the party.
That's why Mamma.com (MAMA: news, chart, profile) is today's pick for Stupid Investment of the Week, just a few days after posting 149 percent and 26 percent gains on consecutive days.
Stupid Investment of the Week is designed to highlight the traits and characteristics that make a security less than ideal for the average consumer. That average investor probably hadn't heard of "the Mother of All Search Engines" at this time a week ago. A database search of major U.S. newspapers, for example, found that the company has been mentioned in 230 articles in the last year, with half of those mentions coming in the past week.
Couple a phenomenal short-term pop with a thinly traded stock that just happens to have a cool name in an attractive industry and you've got an issue that will draw more interest than flies on manure. But if investors are going to move from "interested" to "buying" after this kind of move, they need to watch what they are stepping in.
While obviously not a sell signal, neither is Stupid Investment of the Week designed to be an automatic sell signal, as there may be times when unloading a stock may have tax implications, particularly if it's a stock like Momma.com, which has gained about 620 percent in the past year.
Back then, it may have been a smart investment for the average consumer, but they never knew about it.
In fact, a year ago Mamma.com was actually Intasys Billing Technologies, and it would have been hard to find anyone excited about a dull-sounding issue like that.
The Montreal-based company's January name change was part of a makeover that included dumping its billing business to focus on its search-engine/advertising products.
The search-engine world has been particularly hot in the past year, which is helping to fuel interest in Mamma.com, which most industry watchers consider a junior-varsity player. No one disputes the company's potential to move up to first-string status, but that was not what fueled this week's move.
Instead, it was numbers that caused the company's inflated price and trading volume.
Monday afternoon, Mamma.com posted $800,000 in quarterly earnings from continuing operations, compared to a loss during the period a year ago. Fourth-quarter sales more than doubled from a year ago.
Those continuing businesses generated 2003 earnings of $89,000, a stark reversal from an $800,000 loss in 2002.
That good news prompted huge swings in trading. Mamma.com traded more than 10 times its float during those big Tuesday and Wednesday gains, meaning that each of the company's 6-million-plus shares rolled over at least 10 times a day during the run-up.
That kind of short-term volume and price move was reminiscent of 1999, when day-traders would jump on any stock in a popular business and push it well past logical levels.
For Mamma.com, those logical levels are likely to involve a fallback.
On Thursday, the stock lost $1.65, or almost 13 percent, to close at $11.05.
Look at the company's financials and you'll discover that the annual profit it reported was based on some legal accounting sleight of hand. That's not the same as making money based on your business operations.
By recognizing tax benefits from past losses, management is acting in a way that says "We will make money in the future."
That's great, so long as it actually happens. If it doesn't, you've got an accounting nightmare on the books.
Buying in at current prices - even though the stock is relatively cheap on a price-to-sales ratio when compared with its publicly traded competitors - will be no bargain, at least not for you.
But with 2 million outstanding warrants and more than 400,000 options, all at penny-stock prices, somebody will make obscene money if the stock can simply hold the line on where it is now. When the warrants and options are exercised, the number of outstanding shares will increase by one-third, a big hose-down for current shareholders.
Internet fund managers and others do like the search business, and some believe that Mamma.com won't steer them wrong.
But they knew the stock long before it showed up in the news.
"This is a bubble baby," says Michael Markowski, director of research at Stockdiagnostics.com. "It has an unproven business model and negative cash-flow, and it has been trading more than 10 times its float for a few days.
"Once a stock pops this much - particularly a stock that you've never heard about - you are late to the party, and you should stay away until things settle down. If you still like the stock then, you'll get it at a better price and probably have better results."
Chuck Jaffe is a senior CBS MarketWatch columnist. His work appears in dozens of U.S. newspapers. His MoneyLife with Chuck Jaffe radio show airs daily from 11am to 1pm ET on AM-1060 WBIX in Boston and can be heard live online at www.wbix.com.
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