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William Schaff
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Taking Stock: Don't Look For Sense In The Stock Market

It's one of those lessons that can't be taught often enough. Know the hole in which you want to throw your money, William Schaff says.

Since most of my faithful readers are hard-working IT professionals, I realize that most don't have time to watch the financial markets closely on a day-to-day basis. In fact, most of you probably aren't opening your brokerage statements, either, until months after you get them. Oddly enough, this may be a very healthy attitude, given the strange behavior of the market.

Sometimes when I ponder the financial markets, it appears that the lunatics are running the asylum. Let's look at a company, Mace Security International, that has done particularly well in recent weeks. From the name, you may guess that the company makes antivirus software, bomb- or chemical-detection technology, or something that would be high profile and potentially very lucrative, with vast market potential. That might explain the performance. But we aren't talking about anything that glamorous.

So what does Mace Security do? The name is synonymous with personal-defense sprays. I know my neighborhood is getting a little rougher, but I don't see this stuff flying off the shelves. Well, has the company extended its product lines to help in homeland security, a very hot topic in investment circles? No such luck.

The business is heavily focused on car washes. In fact, it's the only publicly traded car-wash operator that I know of. Now, it does own a lot of valuable real estate and generates positive cash flow from the car-wash operations. And it also has started a line of digital security video products. Well, has this translated into substantial fundamental improvements such as double-digit revenue and earnings growth? Nope. For the first quarter of this year, the company reported revenue of $12.7 million, up 0.5% year over year, and earnings per share was 2 cents versus 3 cents last year.

This is the kind of stock that's the domain of trigger-happy day traders. They love rumors and volatility. When the stock has a small capitalization (Mace Security's number of outstanding shares is relatively small), there's greater potential for day traders to make money at your expense. Mace Security was a stock that used to be lucky to see daily trading volume exceed 10,000 shares. But on April 13, the stock traded more than 53 million shares. This is for a stock that has only 13 million shares outstanding. In two days, the stock went from $3.05 to $10.15. Since then, the stock has seen many days where daily trading volume has been 1 million to 20 million shares. Does anyone believe this is rational?

My advice for investors remains the same. Don't speculate on names that you have little knowledge of or rarely have heard of until your third cousin called with a tip. If you feel tempted, for some unknown reason, to invest in a very small company, look at the trading volume to see if the company has seen trading volume spike up in recent days. If trading volume has increased tremendously, then your third cousin probably told a lot of other people first. As usual, you'll probably be the last person in. In my experience, in all probability, you'll also be a poorer person coming out.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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