What Does "Cats and Dogs" Mean?

In investing, the phrase "Cats and Dogs" refers to speculative stocks that are engaged in questionable business practices. Often, such companies are traded over the counter (OTC) and are subject to limited oversight by regulators.

The origins of the phrase may lie in the use of "dog" to refer to an underperforming stock. The phrase is often used in bull markets to signify that buying activity has become speculative, as in the phrase, "everything is going up, even the cats and dogs."

Key Takeaways

  • "Cats and Dogs" is a phrase referring to speculative companies.
  • It is associated with stocks traded OTC with limited financial oversight.
  • Investors in such companies are at elevated risk of fraud, such as from "pump and dump" schemes.

Understanding "Cats and Dogs"

Cats and dogs are also referred to as penny stocks, companies with small market capitalizations and limited trading volume that trade OTC rather than on a traditional exchange. Often, they are traded on the so-called pink sheets. Unlike major exchanges, pink sheets have limited financial reporting requirements, increasing the risk of fraud. However, legitimate and sound companies also trade on pink sheets, so investors need to thoroughly research companies before investing in them.

Investors may struggle to find timely and reliable information about such companies, because they do not receive the same scrutiny from regulators, such as the Securities and Exchange Commission (SEC), that larger companies do. This is because the SEC, which oversees publicly traded companies, only obtains financial filings from companies with over $10 million in assets and at least 500 registered shareholders. Smaller companies can therefore avoid registering their financial statements with the SEC, making it easier for unscrupulous companies to mislead investors with false information.

One especially dangerous type of fraud is the pump and dump scheme. In it, the perpetrators publish overly optimistic or misleading claims about a company's prospects using various communication channels, such as email, news releases, online message boards, and social media platforms. The aim of these messages is to inflate, or "pump up," investor enthusiasm for the security in order to induce new buyers and a rise in the stock price. Generally, these schemes are focused on thinly-traded OTC companies whose price is very sensitive to even small amounts of new purchase activity. When new investors come in and raise the stock price, the perpetrators of the scheme "dump" their shares and lock in a large gain. The new investors, for their part, face large or even total losses.

Real World Example of "Cats and Dogs"

In 2005, a pump and dump scheme was carried out involving the Nevada-based shell company, VMT Scientific. The perpetrators of the scheme acquired the company and then masked their ownership position by transferring their shares to offshore brokerage accounts. They then promoted the company online and through news releases, issuing a series of false claims about a claimed "breakthrough" medical product allegedly capable of reducing the risk of amputations related to diabetes.

Investors, reacting to this news, rushed to buy shares in VMT, causing the stock price to soar. In response, the fraudsters dumped their shares for a gain of almost $1 million. In reality, the alleged product did not exist and the company, which was under court custody at the time, had no revenue or operations.