For low priced stocks, focus on the pumps

Posted Jun 2nd 2008 12:36PM by Timothy Sykes
Filed under: Competitive Strategy, Ford Motor (F), Sirius Satellite Radio (SIRI), IndyMac Bancorp (IMB)

As I wrote a few weeks ago, traders and fans of low priced stocks should ignore fallen blue chips like Ford Motor Co (NYSE: F) and Sirius Satellite Radio (NASDAQ: SIRI) and focus more on smaller volatile stocks like China Precisions Steel Inc (NASDAQ: CPSL) and Solarfun Power Holdings (NASDAQ: SOLF). Not just because fallen blue chip stocks are all about guessing major business trends and the time lags involved with pricing those into their stocks -- good luck with that -- but because these lesser known plays offer much more predictability due to their speculative nature.

Earnings, profit margins, product potential is all well and good for long-term investors in higher-priced names, but here in the gutter of the stock market (also known as penny stock land), those variables are highly irrelevant to predicting hourly, daily and even weekly price swings. Down here it's all about self fulfilling prophecies, pumping and message board hype.

Take for example, Middlebrook Pharmaceuticals (NASDAQ: MBRK), mercilessly pumped by TheStreet.com's Adam Feuerstein for the past several months as a takeover candidate, as his sources indicate bidders in the $6 to $8 range. Now he might be right -- not that it's going to matter to the SEC -- and while he certainly can't compete with CNBC, in terms of effectiveness, his credibility and frequent teasing have predictably pumped this stock up a solid 20-30% so far.

Other pumpers -- mind you, I don't use this term negatively, at least not always, but rather I use it to show respect to those who have followers based on their superior track records like "Lionmaster" over at TheLion.com -- have recently been touting Indymac Bancorp (NYSE: IMB) and Limelight Networks Inc (NASDAQ: LLNW) mainly because both stocks seemed to have worn out the sellers and speculation about any number of variables causes dip buyers to become interested.

So, I urge you to take a look at these kinds of factors, and if you truly begin to understand their power, then you might just also realize profiting off these pumps -- whether you buy into or short sell against them -- is infinitely easier than profiting from actual business variables, all of which are analyzed by thousands of people smarter and richer than you -- aka this is the poor man's stock trading strategy.

Disclosure: Timothy Sykes has no positions in any stock mentioned

Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager, star of the TV show Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund

Tags: cpsl, f, featured, imb, llnw, mbrk, siri, solf, tim sykes, TimSykes