The latest "issue" of "Investment Trader Trends" to arrive in the mailbox promised "hot new investments for 2006," "a new market sector that you can't afford to ignore," and a stock that "could yield a staggering 600 percent return or more!"
But this wasn't any investment newsletter talking about different stocks, or some magazine discussing trading strategies.
Instead, it was a clever, slick, fold-over piece of bulk mail, and the entire "issue" was dedicated to one company, Life Exchange (ticker LFXG), a new stock that carries a "10 out of 10" rating, according to Investment Trader Trends. The publisher also gave the stock a target price of $14.33 per share, roughly 10 times its current value.
What the purported newsletter did not say is that thanks entirely to its pump-up-the-trading-volume effort, Life Exchange is a Stupid Investment of the Week.
Stupid Investment of the Week showcases the issues and concerns that make a security less than ideal for the average investor, in the hope that showcasing the flaws in one issue will make them easier to root out elsewhere.
While obviously not a purchase recommendation, neither is the column meant as an automatic sell signal; in the case of a young issue like Life Exchange, supporters likely will need above-average knowledge to have the nerve to stick with their pick after the bulk-mail buzz is gone.
The Investment Trader Trends junk mail is a fancy twist on a common pump-and-dump ploy. Typically, investors get spam e-mails or junk faxes touting hot issues purportedly poised for takeoff.
The mail piece is much more polished and impressive, mixing some accurate information on Life Exchange with hyperbole.
The average investor might have a tough time distinguishing the truth from the hype.
Life Exchange is a new stock, created in January through a merger of the two-year-old business with a company called Technology Enterprises.
In a move common to penny stocks, Miami Beach-based Life Exchange hooked up with a shell company, did a reverse merger and — armed with a new ticker symbol — took Technology Enterprises' place on the Pink Sheets. (Interestingly, almost a year to the day earlier, Technology Enterprises completed a similar kind of deal with a company called Value Software.)
Life Exchange is in the "life settlement" business. Life and viatical settlements are deals in which the holder of a life insurance policy sells the eventual benefits in exchange for a reduced-but-immediate cash benefit.
The settlements can be packaged into securities — similar to mortgage-backed securities — which can then be traded; Life Exchange is creating a market for trading these settlements and securities.
Wall Street firms are intrigued by the life-settlement business because the value of these insurance-related products is not tied to the activity in the stock market.
Investment Trader Trends uses superlatives to make the stock and its business sound firmly established, rather than like a raw start-up. It uses the company's Web site — www.life-exchange.com — to hint at having support from management.
Yet company founder Dave Dorr says he has "no clue what Investment Trader Trends is, or who is behind this. They are not affiliated with us in any shape or form. We have not heard of them, period."
Dorr had not seen the mailer and was unaware of it until called for this column.
Attempts to push and manipulate a stock's price don't require management participation; new issues like LFXG can move wildly thanks to almost any report, making them juicy targets for speculators looking to play pump and dump.
LFXG shares have moved wildly since it went public, but average daily trading volume is about four times the norm in the week-plus since Investment Trader Trends put its card in the mail.
With any stock tip, investors should dig into the details that supposedly make the issue a flaming buy.
But Life Exchange trades on the Pink Sheets — a centralized quotation service that collects and distributes market-maker prices for securities traded in the over-the-counter market — meaning that investors can't learn much.
Many fine companies trade on the OTC Bulletin Board and on Pink Sheets, and countless investors profit from dabbling in penny stocks. But it can be the seedy neighborhood of the investment world when a Main Street investor strays into it.
Companies "traded on pinks" are not required to meet the minimum asset or revenue levels of the big stock exchanges. Most pink-sheet stocks do not consistently file regulatory paperwork, like quarterly financial statements.
Life Exchange has yet to make significant financial disclosures, although Dorr expects to produce numbers as the firm gets more established.
Without that data, however, the investor can only check out the source behind a "10 out of 10" rating and a projected yield of 600 percent or more.
Only in the fine print of the Investment Trader Trends notice do you learn that the firm — about which no significant information is available — was paid 300,000 shares by a "third-party shareholder" and that those shares must be sold to pay for the cost of the ad.
And in one of my favorite disclosures ever, the all-important "target price" was determined "arbitrarily."
Arbitrary, in this case, probably means "whatever it cost us to print and send the ad, times 25."
"This is the neighborhood of investments where people stand on street corners and say 'Hey buddy, want to buy this?'." says Robert Green, investment strategist at Briefing.com. "Without any real information other than what was sent by someone clearly trying to profit from their own advice, you don't know enough to invest."
In the end, Life Exchange is currently like the supposed Rolex watch being sold for 10 bucks on a street corner in a city near you.
You may hope it's real, and it may turn out to have some value — even a cheap watch that doesn't work is right two minutes a day — but it's not likely to make you rich, and it's not going to be worth your money until you can establish that it at least has the potential to work.
Chuck Jaffe is senior columnist for MarketWatch. If you have a suggestion for Chuck Jaffe's Stupid Investment of the Week, or a comment about this week's column, you can reach him at jaffe@marketwatch or Box 70, Cohasset, MA 02025-0070.