I can remember the good times for technology and venture capital company CMGI (Nasdaq:CMGI). This was back during the dotcom boom.The company had its hand in numerous hi-tech businesses, all with the potential to flourish and grow. Investors were going to make boat loads of money. Life was good.
But things have changed quite drastically for CMGI since the turn of the millennium. The so called "internet incubator" used to be trading well over $100 per share and its CEO, David Wetherell was all but walking on water. The the bubble burst and CMGI was no longer the darling of Wall Street. Now its stock is trading just north of a buck and change.
Rather than funding countless start-ups in hopes of selling them later for billions, the company is now focused on providing supply-chain management services and it's struggling to earn consistent profits.Despite the company's efforts, its expected to earn just 6 cents per share in fiscal 2008 and 16 cents per share in fiscal 2009, which even for a stock that trades at around $1.40 isn't overly cheap in my opinion.
Reverse Split Hurts Investor Psyche
What really caught my eye, and what really got under my skin was the company's recent announcement that it is planning on doing a 1-for-10 reverse split effective November 1.
The reverse split is disturbing to me, because over the last couple of years a lot of retail investors (people like you and me) have gotten involved in this stock with the idea that they were picking up a quality company on the cheap, and that ultimately the stock would ascend on the company's operational merits.
It hasn't ascended. And now, with the reverse split, investors that have been loyal will see their share counts drop drastically. In other words, investors who owned 1,000 shares will now have just 100 shares post split. Although this won't affect the dollar amount of their holdings or the company's market cap, it is likely to be a psychological blow. Now for every buck the stock goes up, that investor will get $100. That's a far cry from $1,000.
People buy $1 stocks for a reason - because they can make a killing on even a quarter or a half point!
Now, I know the theory that unless the company trades at $5 or $10, the majority of institutions won't be interested in them. I understand the theory, but from what I've seen, reverse splits are far too often the kiss of death. (For related reading, see The Pros And Cons Of Institutional Ownership.)
To illustrate the point, JDSU (Nasdaq:JDSU) has been dead money after it completed a 1-for-8 reverse split back in October, 2006. This is despite the fact that the general market has fared pretty well. I worry that CMGI could be headed down a similar path.
The Bottom Line
CMGI has really disappointed me. While the company deserves credit for its attempts to generate a profit and renounce its dotcom ways, in my opinion it has done a lousy job of talking about that strategy with the Street. The recent announcement that it's going to do a reverse split seems like a slap in the face, particularly for smaller investors.
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