Reverse Splits

[Guapo]

Reverse splits in the pennies don't work the way you think because:

1. Legitimate and reputable companies that are profitable rarely if ever pull straight* reverse splits. There is no need for them to do so.

2. Reverse splits are associated with pumps and dumps. That's been the history of reverse splits in penny stocks. Companies do a reverse split to take excessive shares off the market. They almost always change the stock symbol. They sometimes change the company name to disguise themselves, coming up with a completely new business. Then they invent another "GOOD STORY" and start another pump and dump.

3. So if a penny company pulls a reverse split, it's usually the kiss of death. It destroys the company's reputation. "Investors" don't trust them anymore because there's always the thought the company is nothing but a pump and dump. The idea abounds that the company is in the business of selling stock and nothing else. Knowledgeable folks know that most likely the PPS will tank after a reverse split and they will lose most of their cash in the stock.

4. Because "investors" don't trust the company anymore, nobody wants to touch the stock, the volume falls off next to nothing and the stock goes dead - very little volume with almost no movement in the PPS.

5. Your multiplicity is killed. After a reverse split, the stock's PPS is so high it's difficult for you to make even 50% on it. You have very little chance of making much money in the stock because the number of shares you have is reduced to almost an insignificant number. If you're involved in a reverse split and end up with 1000 shares of stock at a PPS of .5 for example, the stock has to move to $1 a share for you to double your money. If the company has no business to speak of, no profits, very little revenue, etc, that's difficult. It won't move to $1 a share. Rumor and news with no concrete evidence of the company's viability will not sustain a PPS at that level in most cases.

Let's say you have 500,000 shares of a stock with the symbol CRAP and the price is .0010. You paid .0010 for it, costing you $500. For simplicity let's say they do the reverse split when the PPS is at .0010.

It's a 1/500 R/S. After the reverse split you now have 1000 shares at a PPS of .5000. You still have your $500 --- 1000 shares X $.5 PPS = $500. So you're still OK, no harm done, correct?

Au contraire. When the stock was sitting at .0010 before the R/S, it only has to move to .0020 for you to double your money. If it moves to .0040, you're quadrupled your money. A penny stock moving from .0010 to .0040 is a lot easier than one moving from .5 to $2 because a penny stock will run on rumor or just about anything, sometimes for no apparent reason, to .0040 from .0010. Rarely will a stock do so from .5 to $2, or even $1.

I used a 1/500 R/S in the example above. However, 1/1000 and 1/5000 reverse splits are common. Even 1/10,000 reverse splits happen. If you're holding 500,000 shares of CRAP and the company pulls a 1/5000 split, you now have 100 shares left. If the stock tanks after the reverse split, which almost always happens in the pennies, you're wiped out. With 100 shares, you have almost no chance of recovering your cash.

Now there are exceptions but they're rare. Legitimate companies actually making money can get away with small reverse splits because they have profits and their reputation to sustain the price of the new PPS. Microsoft or P&G could do one for example because everybody knows they aren't pumps and dumps. I guarantee you tho, even those companies would take some flack from their investors. Nobody likes to see their shares reduced.

Without getting into another long discussion with everybody, there is no evidence INSQ is a home-run hitting stock, as you said. I don't know how long you have been in the stock market, but knowledgeable investors with lots of cash don't mess with penny stocks. They will laugh at you if you try to convince them a penny company is a home-run hitting stock.

INSQ hasn't made a penny yet. As far as we know, they have little or no revenues yet. ALL we have is company **PR~s saying they have contracts with more coming. All we have are predictions for the future. Contracts by the way can be canceled just as quickly as they were negotiated.

What drives stocks over the long haul is success, becoming stable and making money. INSQ hasn't done that yet.

What drives penny stocks over the short term is rumor and news. The news in more cases than not is usually nothing more than PR~s by the company promising great things will happen in the future.

Whether INSQ does become a home-run hitting stock depends if they can become successful. Nobody knows if they will. So far all we have is the company's word what they intend to do in the future.

I don't see INSQ as a home-run hitting stock in any sense of the word. It hasn't proven itself yet. You may believe it appears to be a home-run hitting stock and it may actually turn-out to be one, but it ain't there yet.

INSQ, VRDM and GSHF are simply penny companies that were at the right place at the right time when the news and discussion about ethanol and energy kicked-off.

IMO, therefore, a reverse split by any of these companies would be disastrous for the stockholders.

[Guapo]

Lastly, even penny companies do not pull reverse splits when their stock is still active, still in play. All three companies have good publicity circulating and enjoy good reputations, if only superficially so right now. Their stocks are currently doing really well. They're not about to pull reverse splits as long as that continues.

* A straight reverse split where only the reverse split occurs, as opposed to a reverse split with a move to a higher exchange, which is often successful.

Even companies doing a reverse split with a move to a higher exchange have to eventually prove themselves by making money, becoming profitable. A good example is GTEL on the OTCBB that moved to the AMEX as GTE last year with a reverse split. Their stock has been slowly drifting down because they're failed to make any money yet. Actually they're hemorrhaging cash like crazy and appears they're only staying in business by selling stock.

** I don't know how many penny companies you're following but just pick out a few that have recent PR~s and read them. Do you see any similarities with those and INSQ? You'll find they all promise great things in the future, but they haven't accomplished much yet. Obviously not all these penny companies will become the next SIRI (Sirius Satellite). When's the last time you heard of a penny company making it to the big time?

[Guapo]

Update: Three Reverse Splits - WNSH, IVOC & IPRE

These are three companies that did reverse splits in 2006, where stockholders’ lost a large percentage or almost all their money.

Current symbols:

WNSH – still WNSH
IVOC – now IVOI
IPRE – now IPEI


WNSH

Original WNSH article, Page 21 post #205:

Title: Two Reverse Splits – Real Examples Part 1

Link to page 21:
http://www.hotstockmarket.com/forums...=36435&page=21

The post-split PPS was .875. The stock tanked after the reverse split in January 2006. It was sitting at .0008 on 02 June 2006. WNSH finally bottomed-out at .0001 where it has remained most of the time.

The company had another R/S scheduled for January of this year but canceled it. There are now rumors of a reverse merger. Just today, 08 May 2007, the PPS jumped to .0002 from .0001, most likely caused by the rumors of the reverse merger and some hype on the boards.

Here it is 16 months after the reverse split however. Investors who have held through the reverse split haven’t recovered a dime of their money. In fact they’ve out almost 100% of their cash.



IVOC

Original IVOC article, Page 21 post # 206

Title: Two Reverse Splits – Real Examples Part 2

Link to page 21:
http://www.hotstockmarket.com/forums...=36435&page=21

The company announced a 1/200 reverse split, April 26, 2006. The post-split PPS was about .18. By 02 June of 2006, the PPS had lost half its value and was sitting at .0090. The PPS today 08 May 2006, over a year after the reverse split, is .0013. Investors continuing to hold have experienced about a 93% loss.



IPRE

Original IPRE article, Page 23 Post #226

Title: More On Reverse Splits – IPRE

Link to page 23:
http://www.hotstockmarket.com/forums...=36435&page=23

The dates and prices are approximate for this one since I didn’t keep any records at the time of the reverse split. IPRE did a 1/500 reverse split about the middle of October 2006. From the IPRE/IPEI threads, the best I can determine is the post-split PPS was somewhere about .20-.25. The chart shows a post-split PPS of .30. It doesn’t really matter if the post-split PPS was .20, .25 or .30. The PPS closed 07 May 2007 at .015. Regardless which post-split value you use to calculate your percent loss, it’ll be over 90%.

Take a look at the IPEI chart below (From Stockcharts.com). The post-split price is at point A. If you had sold immediately after the reverse split (assuming that was possible), you could have gotten most of your money out, point B. The stock initially held its post-split price pretty well for about a week, point C.

If you had waited the week or so after the reverse split, around the 3rd week of October 2006 to sell, point C, you could have still recovered about two-thirds of your money.

If you have waited until 01 December, you could have recovered approximately half your money. To have sold your shares and recouped half of your investment at this time would have been wiser than continuing to hold. Dilly-dallying further would have cost you even more.

The stock finally tanked, 18-19 December 2006, point D, stabilizing temporarily around .0250. Anybody still holding when the slide came to a halt would have been down about 90%.

In March of this year, the PPS recovered somewhat and move up to about .08, point E. Folks still in the stock could have sold here and retrieved a little more cash, roughly one-third of it.

One third is better than nothing, right? You bet it is, because after hitting about .08, the PPS took another steep dive to where it’s at today, point F. I don’t anticipate investors recovering much of their money in this one either.


BTW, the latest stock to drag its investors through a reverse split was MUME, now MUMI. MUME did a 1/1000 reverse split on 27 April 2007, about two weeks ago. Almost immediately, it lost 88% of it post-split PPS of .1000. The stock has regained some of its losses, sitting today at .035.

Folks that decided to ride out the reverse split are now down about 65%. It’s chancy whether they will ever recover all their cash in this one too, because trading has dropped to almost nothing, small volumes with very few trades each day. I anticipate MUMI to decline further as time passes.

The trading patterns of penny stocks that undergo straight reverse splits can vary. Not all of them collapse immediately after the reverse split. Frequently an investor has an opportunity to retrieve at least some of his cash. However almost all pennies that undergo a reverse split eventually cost stockholders a large percentage of their investment. Generally, the longer one holds after a reverse split, the more money he will ultimately lose.

[Guapo]

Another Penny - JCMP - Bites The Dust

And Takes Stockholders’ Money With It*


Yes Sir Re folks, another penny stock will implement the dreaded REVERSE SPLIT. This time it’s James Monroe Capital Corporation (JMCP).

I’ve reported previously on penny stock reverse splits(1) but this time we’ll follow JMCP "Live"! Their reverse split will be effective Tuesday, 19 February 2008, trading that day under the new stock symbol JMON.(2)

James Monroe Capital Corporation changed its name(3) from Commonwealth American Financial Group (CWFG) in May 2006 without a reverse split. It was trading at .0001 at the time of the name change and except for a few spikes to .0002, has been trading at .0001 for the last 21 months or so, since the name change.

I won’t spend a lot of time discussing the company’s history since it became JMCP. Details can be found in the two JMCP threads here on HSM(4). However, here’s a brief list some of the business activities of the company, according to them.

1. The purchase or construction of an ethanol plant
2. A resort in Costa Rica
3. A royalty trust(5)
4. A gold mine in Africa
5. Oil wells in Pennsylvania
6. Sludge ponds in Russia


As far as I can ascertain, none of the above projects have produced any income for the company. The company certainly hasn’t reported any that I know of anyway.

One might ask why JMCP is doing a reverse split. Two words, stock dilution. I don't have the exact numbers but about a year or a year and a half ago it was reported the O/S was somewhere around 46-48 billion with about 27-28 billion of that in the float. The only way the company can reduce the O/S to a reasonable level is via a reverse split.

Their reverse split will be a large one, 1:10,000. While not the biggest I’ve seen, it’s of sufficient size to severely damage stockholders, wiping out most of their holdings. For example, a stockholder with 1 million shares pre-split will have 100 shares post-split.

The reverse split itself does not decrease the dollar value of an investor's holdings of course. However, typically in the pennies, the PPS drops dramatically after the reverse split, generally 50% in the first few days or so. Afterwards, the PPS usually continues to drift down with little trading, resulting in losses up to 90% or more after a few weeks or months.

It’s possible also that when trading begins next Tuesday, JMON may open 50% down, leaving investors with a 50% loss before they have a chance to sell their stock. Of course we don’t know for sure that will happen with JMON. There is always the chance too the stock may increase in price, but I personally wouldn’t bet on that.

If you want to observe JMON’s trading in real time next Tuesday, put it on a watch list so you can follow it. I will be tracking it from the open and will report its progress, or lack thereof, in the post following this one.

Perhaps JMON will provide a good demonstration in real time what usually happens to penny stocks that pull reverse splits. If you can’t follow it live, check the next post occasionally. I’ll provide updates of the action by day/date/time.

Guapo


* That’s my guess anyway.

(1a) http://tinyurl.com/22ztqe
(1b) http://tinyurl.com/2yuxl5

(1c) http://tinyurl.com/2a4of4
(1d) http://tinyurl.com/2ehg82

(1e) http://tinyurl.com/2a786q

(1f) http://tinyurl.com/2489pb


(2) http://tinyurl.com/277hvr

(3) Go here and click on “Company Info”: http://tinyurl.com/29pe8y

(4) http://tinyurl.com/2hhwqt & http://tinyurl.com/2y66hr

(5) A trust of some kind which was supposed to be much more beneficial to stockholders rather than simply holding shares in the company. Details are in the second JMCP thread.

[Guapo]

JMCP's Reverse Split - Running Update


Effective Date of Reverse Split (1:10,000): Tuesday, 19 February 2008

Old Stock Symbol: JMCP
JCMP Closing Price 15 February 2008: .0001

New Stock Symbol: JMON
JMON New Price: 1.00
JMON Opening Price 19 February 2008: .15

1 ****
Tuesday, 19 Feb 2008 8:30 AM:
One hour before the opening this morning the bid and ask are showing as .25 and .35 respectively. These numbers may be meaningless however.
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2 ****
Tuesday, 19 Feb 2008 9:30 AM:
Opening bid and ask were .15 and .30 respectively. First sale at 9:32 was .15, down immediately from 1.00. Three minutes from the opening, the 4th trade was down to .06. Small volumes however, largest trade so far by 9:40 AM is 5000 shares. JMON looks like it's gonna be one of the really bad ones (after a reverse split.)
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3 ****
Tuesday, 19 Feb 2008 Noon:
The PPS is currently sitting at .03. The bid is .02 and the ask .03. Trading has been thin and slow. Total volume so far is 254,358 shares on 25 trades. Most of the trades have been small, the largest one so far 99,500 shares. That's to be expected however since most folks that held through the reverse split had their holdings reduced to several hundred or a few thousand shares.

You may see two figures for the previous close, depending on what source you're using. Yahoo Finance shows 1.00. Other sources show .90.

The previous close in this case is the new post-split price. Assuming the reverse split was done at a precise 1/10,000 ratio, a previous close of .90 means the stock's price before the calculation for the reverse split was .00009 and not .0001. Considering the size of the float before the reverse split, it wouldn't surprise me if the stock had been trading at less than .0001.

For calculation purposes we'll use 1.00 as the opening post-split price for the stock.
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4 ****
Tuesday, 19 Feb 2008 4 PM:
The closing price today was .02. Volume was 1,490,890 shares on 63 trades. Closing bid was .015. Closing ask was .02. JMON lost 98% of its post-split opening price of $1. These numbers may change slightly shortly after closing.

Investors who had purchased shares at .0001 and held through the reverse split lost 98% of their investment in a single day. A 98% decrease the first day after a reverse split is the most severe drop I can remember. I don't foresee JMON recovering from its collapse today.
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5 ****
Wednesday, 20 Feb 2008 9:30 AM:
JMON opened at .03. Opening bid was .015. Opening ask was .03. As time passes, I expect to see a further decline in the PPS, volume traded and the number of trades.
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6 ****
Wednesday, 20 Feb 2008 4 PM:
JMON closed with no change today at .02. Volume was light, only 92,366 shares changing hands on 19 trades. The bid and asked dropped, closing at .011 and .02 respectively. JMON remained 98% down from its opening post-split price of 1.00
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7 ****
Thursday, 21 Feb 08 9:30 AM:
Not sure what happened at the opening. I'm showing two trades at 9:30:10 AM, one for .015 and the other at .030. At 9:38 AM, the PPS is .020. The bid and ask are .02 and .025.
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8 ****
Thursday, 21 Feb 08 4 PM:
JMON closed at .016 on a volume of 143,643 shares. There were 43 trades. The closing bid was .016, the closing ask .025. JMON will probably flounder around its current price for a while. As more people sell their shares - what they have left after the reverse split - the volume will further decline. As the volume drifts lower, the PPS will follow.
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9 ****
Friday, 22 Feb 08 9:30 AM:
Nothing surprising this morning. JMON opened at .016 with the opening bid .016 and the opening ask at .025. No changes from the closing yesterday. Trading so far is slow as expected.
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10 ****
Friday, 22 Feb 08 4 PM:
JMON's LOD and HOD were .016 and .025. It closed at .020 with the bid and ask the same. Volume was 311,506 shares on 39 trades. The volume was up from yesterday but with very little trading. 39 trades in one day is very thin.
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11 ****
Tuesday, 26 Feb 08 4 PM:
I don't have all the numbers for yesterday but the stock closed at .019. Hardly any change at all. The stock closed today at .02. I'm showing a volume of 275,845 shares on 23 trades. 23 is not many at all. It's an indication very few people are interested in JMON right now, which is what we expected since reverse splits leave a bad taste in everybody's mouths.

It appears JMON will settle for a while in this PPS range. From today, I'll only post if there is any significant activity in the PPS or volume; and occasionally just to keep everyone up-to-date.
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[Guapo]

22 February 2008


A Post-Split Analysis Of JMCP


We’ve watched JMON (new stock symbol) for three days now after its reverse split. I was shocked at its quick drop the first day. This is the most precipitous decline I remember for a penny stock undergoing a reverse split.

I expected a 50% decrease the first day but JMON opened about 98% down from its original post-split price of 1.00, which eliminated any chance investors had of recovering a reasonable amount of their money. By the close of business Thursday, 21 February 2008, the third day after the reverse split, the stock had failed to rebound at all, closing at .016.

Absent any company activity, the PPS and volume will continue to gradually decline. Generally after reverse splits in penny stocks, the volume eventually drops to a few thousand shares traded each day. Frequently the stock goes dormant with no trading at all.

We don’t know how large the O/S and float were before the reverse split but we can hazard a couple of ballpark guesses and make reasonable estimates of their sizes afterwards.

The last numbers I have for the O/S and float from last year were about 48 and 28 billion respectively. It’s possible the float has been diluted further, so let’s assume a pre-split O/S of 100 billion and a float of 80 billion.

Therefore, with a 1/10,000 reverse split, the resulting O/S would be 10 million and the float 8 million. Even if the pre-split numbers were 500 billion and 400 billion, the O/S would be 50 million and the float 40 million, post-split. Most pennies don’t dilute that high, to 80 billion, before they do a reverse split. Therefore I think there is a good chance the O/S and float aren’t higher than 50 and 40 million, with a strong possibility they are lower.

These calculations demonstrate the purpose of reverse splits, to lower the amount of stock in the market. As you can see, a 1/10,000 R/S is very effective, reducing the O/S and float ten thousand fold. A float of 40 million is fairly small. Under normal circumstances, rumors and news can easily move the PPS of a stock with a float this size.


What does the future hold for JMON? The owners of the company have three options. They can deregister the stock and let the company die, they can immediately start with new business activities or they can wait a while, a few months or longer, and then rejuvenate the company.

The owners may deregister the stock if they want to sell the company or go out of business, for example.

If the owners desire they can begin immediately advertizing the company again with PR~s and other techniques. You may think the owners would take this option. Why wait several months, right? There’s one primary reason. None of the business plans announced by JMCP ever came to fruition. There was severe dilution followed by the reverse split. Some investors have waited about 22 months, some even longer. All of them have lost almost all their money. Those who suffered through the reverse split are angry; and they’re loud.

News of reverse splits travels fast. Many people, a much larger number than those caught in the reverse split, have heard about JMCP. Most people following penny stocks are familiar with the company’s recent history. Hardly anybody will touch the stock right now. A quiet period therefore gives the company time to distance itself from its recent past.

I believe JMON will go with the third option and wait a while before resuming any company activities. We may also see another stock symbol change, a new company name and business plan.

Irate investors will cool-off, drop out of the market or move on to other stocks. Folks that weren’t involved will soon forget. Six months from now, JMON will be a distant memory for most folks.


****** Start - Latest Update 31 January 2009 ******

JMON, previously JMCP finally has sunk to .0001. It took it almost a year. JMCP did its reverse split on 19 February 2008. The original post-split price was $1 but the opening price price after the reverse split was .15.

There has been no PR~s from the company that I can find and no activity in the JMCP (JMON) thread for a long time, with very little trading in the stock. Everyone still holding the stock has lost 99.93% of their cash.

I am a little surprised the owners haven't tried to resurrect JMON. They still may at a later date or perhaps they have moved on to other things and will let JMON die, not that it's been dead for a while already.


****** End - Latest Update 31 January 2009 ******

[Guapo]

JMCP's Reverse Split - Running Update

12 ****
Friday, 29 Feb 08 4 PM:
Today JMON closed down today 68% from yesterday at .006. It dropped some yesterday but managed to recover its losses before COB. The volume today was 107,950 shares on only 14 trades. With the close today at .006, JMON is now down 99.4% from its original post-split price of a dollar. If you had $1000 invested in the stock pre-split, you now have six bucks left.
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13 ****
Monday, 03 Mar 08 4 PM:
JMON had only one trade all day, for .008. Perhaps most folks that held through the reverse split have now sold their shares.
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14 ****
Thursday, 13 Mar 08 2:45 PM:
Not much to report on JMON. It's been trading all week between .015 and .011. One day the low was .011. It's had very few trades this week. One day it had only five trades. Today, about fifteen minutes before closing, I'm showing only three trades with a total of 1150 shares changing hands. The PPS is sitting at .0013.
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15 ****
Monday, 07 Apr 08 8:45 PM:
JMON hasn't done much the last three weeks. It's been moving (mostly on the bottom end) between .02 and .01 with only a few trades each day with small volumes. JMON closed today at .011 with only 1900 shares traded.
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16 ****
Friday, 30 May 08 10:05 AM: Well, JMON has been floundering around the last month and a half or so. It's sitting at .01 now with only a small amount of trading. My question is when will the company start promoting the stock again? How long will they wait until they try to put the stock back into play again?"
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17 ****
Saturday, 20 Sep 08 10:05 AM: It's now September and JMON is still sitting quietly. It closed yesterday at .005 with only 1000 shares traded. It's been about seven months since the reverse split with no activity from the company, not even a PR. It might be worthwhile to put JMON on a watch list and set some price and volume alerts. The owners might try to kick this one off again at any time. It's been sufficient time for most folks previously involved to have moved on. If the company comes up with an exciting new plan and with the low float, they might attract enough newbies to make this one move again.
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18 **** Saturday, 31 Jan 09 6:14 AM:
It's took the stock almost a year since the reverse split but the PPS has sunk to .0001, taking all of stockholders' cash with it. There is very little trading in JMON now.
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