From the beginning of June 2014 to mid-July 2014 shares of CYNK Technology Corp (CYNK), a penny stock, ran up by approximately 25,000%. The run up and what caused it is still under investigation, but it was most likely due to a modern day pump and dump strategy in which a small number of shareholders market the stock as being the next hottest pick to entice traders to buy. This case is particularly concerning due to the fact that CYNK had zero revenues, zero assets, a makeshift business plan, and one employee in a faraway country, yet it was still able to reach an all-time high market capitalization of $6.0 Billion USD. At this point the alarm bells should be ringing as this market capitalization is similar to Apple’s market capitalization during 2003 before they released the first version of the iPhone and the company had revenues of $7 billion.
While pump and dump schemes are nothing new, the avenues by which those committing and/or benefiting from the scheme are able to pump up the stock are changing at an exponential rate. The use of social media, in particular Twitter, made it easier for traders and market commentators to constantly buzz about CYNK in a manner never before seen, while commentators on investing forums further complicated the issue. These forms of social media are useful as they provide valuable crowd sourced information, but they also have the potential to portray information as accurate and complete without any recourse if it is not. Unfortunately, this situation can hurt many investors who fail to conduct their own due diligence and are left holding shares of a company that are essentially worthless, as in the case of CYNK. This is why we at Legacy Trust feel that in-depth due diligence and fundamental analysis are paramount in successful investing. I would never buy a car without taking a look under the hood and I feel the same should apply to selecting investments.
Now the real question becomes, why such tiny speculative companies are allowed to have securities that are tradable if they appear to only produce negative results and it seems more like gambling that belongs at one of the new casinos in the area. The reality is that CYNK Technology is a minority case in a pool of very small companies that have difficulty accessing capital markets for financing. Many companies in this pool are legitimate, with measurable revenues and profits, and this form of financing is the only way they are able to gain funding to attempt to grow their business to the next level. These type of businesses are far more speculative than the type of companies we at Legacy Trust typically look to invest in, but they may play a role in a very risky investment portfolio.
As most would probably agree by now, with revenues of zero and no assets, shares of CYNK Technology are worth close to zero and the neighborhood lemonade stand may be worth more. However, there has to be some reason market participants were willing to blindly buy such a speculative stock. I will not speculate as to why and look forward to reading the results of the ongoing investigation. In the meantime, I continue to believe that there are numerous companies, both large and small, that are either over or undervalued and in-depth research and analysis is the only way to identify the true investment value and ensure acceptable risk and return.