Some stocks that pose as big growth stocks attract a lot of speculative wind. How does an investor tell what's real? The answer isn't blowing in that speculative wind. It's in the stock's fundamentals and its chart action.
Speculation and ill-advised investing decisions often occur when the media spotlight shines brightest. It's worth remembering all the busted dot-coms and other firms that tried to parlay big-game exposure into gains. Paying $1 million, $2 million or more for a splashy ad is no guarantee of bigger profits or stock gains, no matter how many people are watching.
In the spring of 1998, Gardenburger began to rise on a similar wave of speculation. The maker of frozen vegetarian patties unveiled a plan to spend more than $14 million in five weeks on advertising — including more than $1.5 million on the last "Seinfeld" TV episode.
The "Seinfeld" finale was termed the "Women's Super Bowl" because of the show's popularity with young women. Gardenburger hoped the ads would drive it from niche product to brand-name status.
The boldness of the move was breathtaking. Gardenburger was ready to drop $14 million on an ad campaign. Yet sales in the previous quarter had been only $13 million, with a 50-cents-a-share loss.
Opinion was divided. Some said spending that huge amount on a five-week ad blitz was too risky. Others said the product had a hip aura and a catchy name that was becoming the generic description, much like Kleenex or Jeep. As baby boomers became more concerned with their health, the theory went, Gardenburger's stock would sizzle. The high-profile ads would light the fire.
Growth Stocks And Fundamental Risk
It didn't happen. Gardenburger had an Earnings Per Share Rating of 26 when it mounted its ad campaign, meaning three out of every four stocks in the market had better earnings.
In five of the six quarters before the "Seinfeld" finale, Gardenburger lost money.
The stock bounced off its 10-week moving average near 9 a share in March 1998. By mid-April after multiple news stories on its "Seinfeld" strategy, it was at 14, a 2-1/2-year high that came in choppy trade.
But the stock was losing mutual fund support. In September 1995, 16 funds owned 556,000 shares. By March 31, 1998, that dropped to seven funds holding 94,600 shares.
Even so, some investors were jumping in to get ahead of the big move they expected. Others were waiting for the market to offer its verdict on the "Seinfeld" ads. They didn't have to wait long.
Gardenburger gapped up 15% on May 11, three days before the TV ads ran.
A Clear Sell Signal, Only On Stock Charts
The stock staged a wild, one-day reversal the next day, falling 7% after touching a 3-1/2 year high of 16.13 on nearly six times its average volume (1). The accompanying chart shows weekly price-and-volume action.
On May 15, 1998, the day after the ads ran, Gardenburger logged a one-day loss of 19% on more than three times average volume. In the first four sessions after the ads, the stock fell as much as 26%.
Gardenburger began a prolonged descent. It never reached that "Seinfeld" high again. By March 2001, the Nasdaq delisted it. In October 2005, the company filed for Chapter 11 bankruptcy protection. It had been trading over the bulletin board for more than four years, often for less than a buck a share. In 2007, Kellogg bought Gardenburger and continues to sell it under that brand name.
In the spring of 1998, some folks bought on a wish and paid dearly. A look at the stock's weak fundamentals and suspect chart were all an investor needed to get clear thinking on its prospects.
