My rationale for playing the short side on Vuzix

Its Sunday, and at church today our Pastor was talking about the newly Sainted Mother Theresa...and how she lived her life "in the trenches".  In his view she was already a Saint with no need for Rome's approbation.  The rest of his sermon was about not rushing to judgement, how one never knows the circumstances that lead others to make the choices they make. 

With that in mind I thought I'd explain the back story to my decision to play VUZI short.  Others will undoubtedly disagree with my opinions, and that's the way it should be.  I'll explain my rationale and if others want to explain their's the comment section is always open, so long as there's no profanity or personal attacks.

I guess the best place to start is the beginning, with how VUZI popped up on my radar.  I saw it being hyped all over sites like StockTwits and Twitter with posters expressing the view that an investment in this speculative stock was pretty much a sure fire winner....great fundamental prospects for massive growth and all that other stuff.  

So I checked it out.  The chart showed a big climb in a short period of time on heavier than normal trading.  As recently as May of this year the PPS was down around $4.50 and volumes were typically in the range of one or two hundred thousand, and a few days with not even 100K trading. Then in late June volume started picking up, and by July days of 1 million+ were becoming common, in fact there were 3 days late in July with over 2 million trading.

By my reckoning the volumes had increased about 1,000% and the PPS had made big gains as well. Those $4.50 shares being bought and sold when things were quiet...they were long gone as VUZI had traded as high as $9.30 on July 25th.  That's a gain of about 100% off that $4.50 area in May, not a bad return for a couple of months, just a tad better (sic) than what the banks are paying in a savings account.

So here we have a stock, VUZI, which had basically doubled in price over a couple of months on a big 1,000% jump in average volumes.  Check.  The question now for me becomes....Why?  Did the company sign a major contract or  sign a Joint Venture Deal that would ensure big revenues and big profits?  

Time to do some more digging....what caused the increase in volumes and share price?

The company is sponsoring a Drone racing team...okay, but that's going to cost money, it means some exposure I guess.  I'll check local listings for the next big Drone race, maybe its a big thing...I didn't even know there was such a thing as Drone Racing.

More digging......then I found something.

Microcapresearch.com, one of those email blasting promoters put out one of those bullish stories about Vuzix on May 17th which was right when the stock started climbing off that $4.50 low.  The toutsheet's headline for Vuzix called the augmented reality/virtual reality space an $80 billion marketplace.  Uhm, not so fast...that's based on a report by Goldman Sachs that says the space "could" be "potentially" worth that figure....maybe, maybe not.....and certainly not right now.

Here's the link:  http://microcapresearch.com/vuzi-next-big-thing/

At this point the game is pretty clear in my opinion, and I've seen the same script used many times before.  The days of the tech bubble were full of multi billion dollar projections for things like ordering groceries over the internet....I'm sure a lot of people remember that.  Or how about the Internet Refridgerator?  I recall the Virtual Keyboard (or VKB for short)....everyone was going to be using one by now...that was over 10 years ago.  

And of course there were all kinds of penny stocks out there touting themselves as becoming a dominant player with countless new technologies.  The word paradigm became so overused it almost became meaningless.

But wait....Vuzix isn't a penny stock, its trading for $9+ per share.  More research needed.

Okay....it was an OTC penny stock, but then did a 1:75 reverse split and uplisted to the Nasdaq exchange.  I saw that with SBOT, another heavily promoted stock that did a 1:10 reverse to get off the OTC and onto the Nasdaq.  Of course it gave that stock a nice lift to over $20....but since that pop SBOT has imploded and is now only worth $2 and change....happens all the time.  That's pre-split 20 cents or so adjusting for the share consolidation.

Alrightee....all my regular readers, both of them, they know what I try to avoid when going long, what I consider the unholy trinity:  Promotion, News and Hype.

• Promotion gets the sheep to put a stock on a watch list.
• News that is forward looking and safe harbor protected gets buyers to move in and pushes the PPS higher.
• Hype takes over on social media sites and stock message boards.  Anyone who dares to express a bearish opinion is attacked and accused of trying to talk the stock down so they can accumulate.

Now in fairness I do think there are people out there who will trash the stocks they want to accumulate.  But in my opinion that is more likely to happen with stocks that have been beaten down, that are trading at or near their lows, not one that has been pumped up to historic highs on forward looking promise.

I'll close this off with some commentary on social media posting.  When one of the stocks I'm holding gets bashed and trashed, and it happens often enough....LAC, XBKS, RVX and plenty of others...I take a deep breath and relax.  After all, stocks are risky....especially when its the stock of a company that is losing money and relying on selling shares to pay salaries and to keep the lights on.

If someone is truly bullish and buying, then they should welcome and be happy when social media types are posting messages expressing Fear Uncertainty and Doubt.  On the other hand if someone is hoping to dump a stock that's made big gains, then there is logic to attacking anyone who expresses sentiments that engender feelings of FUD.  Its hard to dump high priced shares unless there are bullish excited buyers that think they're getting a bargain.

Peace Out for now.