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Cancer kids explained



October 10, 2007 – Comments (0)

I'm a pretty optimistic guy. I see myself as half full of myself. I think there are actually people reading my blog. I think there are people reading my stock pitches. And I even think that some of those people don't know why I keep referencing "cancer kids." Well here you go:

I am pretty new at investing in individual stocks. I bought a few random penny stocks before learning how stupid that is, I bought Ford when I first started reading about value investing and saw its PE of 6 and dividend yield of 5%... then found out that past year earnings can be misleading, and then bought Mastercard for $49/s based on a Morningstar article that said it was worth $88/s... and then sold it for about $105/s (woohoo!), only to watch it go up above $170/s. What I'm trying to say is, I didn't know what I was doing.

Well, I started to get more organized. I learned to look past P/E for cash flow, evaluate the sustainability of dividends (F's was cut in half between my buy and my sell), judge balance sheets, pick only stocks with high return on equity/capital. In other words, I was learning what all those little numbers mean. I also learned (without losing real money) that housing stocks were being beaten down for good reason. They fell a lot farther after I thought "maybe the selling is about through." The numbers looked good (especially the P/B under 1), but there was more to the story.

I had a Marketocracy account, and I was picking small caps and microcaps, watching them go up 15%, 25%, or even 35% as the market discovered them, or watching them go down as much for no reason I could tell. I opened a short fund for stocks like RIMM, FSLR, PEIX, and others that had no numerical support, but it didn't do very well.

Meanwhile, on the long side, I found a company called Mannatech (MTEX), which had great numbers, a good dividend backed up by strong cash flow, and they had good growth prospects. They had it all. And better still, they weren't in the housing industry, so they passed the industry filter, aka the mushy evaluation. (They made nutritional supplements... what could be safer?) I put them in my small cap long fund, and prepared to watch them shoot the lights out. Yay! Less than a month later, I'm watching Nightline while I wait for PBS to reair that evening's NBR, and what do I see but, yes, it's Mannatech, that little-known, small cap nutritional supplement maker/marketer that pumps dividends into my marketocracy fund! Cool! They made Nightline! They're big time! What could Nightline have to say about my Mannatech? How cool they are? How profitable they are? How everyone must invest in them right this instant? Why are they talking to that bald 14-year-old girl? Well, that girl likes Mannatech. She says it's... curing... her cancer?!? As Seth and Amy say: really?!?

Mannatech cures cancer? How did I miss that? Well, Nightline continued on: it seems that Mannatech, as a non-pharma, is not allowed to say that they cure cancer. Because, as Nightline points out, they don't. In fact, two nutritionalists who have real degrees from real universities pointed out that Mannatech's products are highly unlikely to have any effect other than giving you gas. Meanwhile, Mannatech's commissioned salesmen are telling kids with cancer and grownups with spinal cord injuries that Mannatech could urecay their iseasedray, but that big, bad DAF-ay won't let them tell anyone (wink, wink). I just about fell out of my chair. I thanked God that I hadn't put any real money in the company, and I put the order in to sell my fake money shares at the market open, and short a good bit of it in my short fund at the same time. I hoped that it wouldn't crater 30% at the open and ruin my price and my cost basis.

Turns out, nobody else actually watches Nightline. I'm their only viewer. Mannatech went up about 0.1-0.5% every day for the next couple of weeks. Then the Texas AG filed a lawsuit against them. For all the money they had and were ever going to have. People apparently read press releases from the TXAG's office, because MTEX cratered about 20% when the news broke, and it wound its way down from about $16 pre-lawsuit to a low of about $6.15, where I picked it to underperform in CAPS, therefore causing it to rise, in defiance of reality, back up to about $9.25 as of this writing. If you don't already rate MTEX or rate it outperform, trust me on this: ignore the numbers, ignore the dividend, ignore the news of victory in patent infringement lawsuits. Cancer kids. Lying to cancer kids. My worst CAPS pick is an underperform call on a company that lies to cancer kids. If that doesn't scream "opportunity" to you, you should not invest real money until you get your head screwed on straight.

From now on, I'm red-thumbing the stocks of all companies that I know lie to cancer kids. So far, that's only MTEX. Let me know of any others you may find.

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