Tip of the Week: Investing in Shell Stocks
By David Feldman at 12 August, 2009, 6:52 am
A client recently asked if he should consider buying the publicly trading stocks of shell companies. After all, he pointed out, anyone who put money into the shell that became CKX, Inc., now the owner of American Idol and rights to Elvis and Muhammad Ali, at the time Bob Sillerman bought the shell, made about a 4,000% return. It is very common for shell stocks to double or more when deals get announced, especially given that many trade in the pennies. It is not something I covered in my book as it is a pretty separate topic from the discussion of taking your company public.
I do dabble in shell stocks. But my advice, generally, is don’t try this at home. Like any penny stock investment, many unpredictable factors can negatively affect the stock. Sometimes questionable characters short the stock with the expectation that it will go down. Sometimes it turns out the shell promoter is not legitimately looking for a deal. The stocks generally trade very thinly so even if it goes up a bit you may not be able to sell when you want to that easily.
That said, there are a number of players out there doing this. If you are a professional in this space and are aware of who the prolific and successful players are, and you see them buy a controlling interest in a shell, that’s probably the safer of bets in terms of trading shells. There are several websites which seek to advise folks on which shell stocks to buy- one calling it Wall Street’s best kept secret. I don’t endorse or suggest any, but www.shellstockreview.com is one (they are kind enough to promote my book!) and www.otcstockexchange.com is another (they send email alerts of stocks they think are about to pop). But repeating, I am not providing an endorsement – do your own due diligence and buyer beware!
It may indeed be a decent time to start looking at investing in these. While the market in general has gone up about 50% since its lows, the shell stocks, at least the ones I watch, have not come back after dropping heavily last fall. But merger activity is picking up, so who knows?? Good luck and be careful….
Second to last, if you do this, be patient. Sometimes shells sit for years before a deal comes along. Last, play this like venture capitalists do. They look at 1000 deals, then meet with 100 companies, then invest in 10, then are happy if 1 or 2 are successful. That’s a pretty low hit ratio for professional investors, but hopefully the raging success of the 1 or 2 makes all 10 investments worthwhile. So if you have good luck with one or two shell stocks, chances are it will outstrip your investment in 10 and still provide a very good return.
What shells have you on watch which you say have dropped a lot and not rebounded? Thanks for the info on your site.
There are a few websites that offer monitoring and recommending shells stocks, you should be able to find them with an easy Internet search. I try to stay out of the business of recommending either stocks or places to get recommendations for stocks. Hope you understand!
I got into LFZA for a million shares when it was at .001
It went to .83 in a week!!
I sold half of it at .46 and the other half at .56 — you do the math.
I’m still living comfortably on the profits.
Thank you Mr. Market Maker.