Stock Speculation Sees a Resurgence

With a few strategic stock purchases in recent weeks, your retirement planning worries might have been dramatically lessened.

A $10,000 bet on shares of Internet search engine Mamma.com Inc. on March 1 would have been worth $39,259 by the end of last week.

Another $10,000 wager on Magal Security Systems Ltd., a maker of motion-detection devices, on March 8 had a market value of nearly $42,000 by Friday.

And if you had $10,000 more of hard-earned savings to put down on shares of IPIX Corp., formerly known as Internet Pictures Corp., at the stock’s closing price March 26, you would have seen that blossom to $65,400 by the end of last week.

All told, $30,000 in those three Nasdaq-traded shares would have become $146,000, on paper, in a mere six weeks -- a period in which the blue-chip Standard & Poor’s 500 index lost 1.4%.

If all of this seems too good to be true, your instincts are healthy. The recent wild moves in these shares, and in some other little-known issues, have raised alarm among some Wall Street pros. They fear that speculation is once again becoming rampant in the stock market, as it was in late 1999 and early 2000.

The last such period ended badly, of course. In the 2000-02 bear market, most Internet-related shares that had gone nearly straight up for weeks or months during the technology stock mania came down just as fast. Many eventually became worthless when the firms folded.

Since nobody other than bearish “short sellers” (more on them later) would wish for a replay of the last market crash, the suddenly red-hot action in small tech issues is attracting the interest of securities regulators.

Mamma.com said last week that the Securities and Exchange Commission was investigating trading in its shares, which have zoomed from $4.05 on March 1 to $15.90 as of last week on Nasdaq.

Judging how much speculation is too much is more art than science, however. Regulators can act if they believe someone is manipulating a stock -- for example, if a company is misrepresenting its sales or profit prospects to drive up its shares.

But what if the public simply gets excited, rightly or wrongly, about a particular stock? People are free to take as much risk as they want.

Indeed, extreme moves, up or down, in thinly traded stocks are nothing new. The question is whether they’re becoming more prevalent -- and whether many more average investors are taking notice, raising the risk of another broad-based mania.

One danger in the current market environment, some analysts say, is that rocketing prices of relatively obscure companies could suck in small investors who are desperate to make up damage done to their portfolios in the long bear market.

In other words, playing catch-up might begin to look deceptively easy as more stocks go from, say, $2 to $8 to $16 in a matter of weeks or months.

“Investors hear, ‘Stay away from the speculative names,’ but the speculative names are leading the charge,” said Todd Salamone, research director at Schaeffer’s Investment Research in Cincinnati.

Last year, shares of mainstream technology companies rebounded far more quickly than some analysts had expected, Salamone noted. This year, the biggest movers are companies that are much further down the quality scale and much higher on the risk scale.

A question that intrigues many Wall Street pros is, who’s behind the latest buying wave in smaller tech stocks? Is it much of the same individual-investor crowd that fueled the 1999-2000 mania coming back for more, or a new group of people who didn’t play in the last mania?

There’s no way to know for sure because trading activity can’t be broken down that way. Which is too bad, because psychologists would have a field day with that information. Historically, it’s unusual to have back-to-back frenzies in the same types of stocks, because people are supposed to develop a deep and abiding aversion to any stock sector that collapses.

Two groups active in the last tech stock go-round are almost certainly back again, analysts say: day traders, who try to make a living hopping aboard hot stocks for as little as a few minutes at a time; and hedge funds, those investment pools that often look to buy whatever has upward momentum, until the day the momentum stops.

As for the stocks at the center of this action, their ascent usually requires a spark.

For Montreal-based Mamma.com, its surge in March was driven in part by news that Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, had purchased a 6.3% stake in the company.

It also has helped Mamma.com that investor interest in other search engines has revived over the last year.

Yahoo Inc., the leading Internet portal, rebounded 175% last year after three years of declines. Yahoo’s rally has continued this year: It’s up 25% since Dec. 31, to $56.21 by the end of last week.

Another portal, Ask Jeeves Inc., is up 121% this year, to $40.05.

Mamma.com calls itself “the mother of all search engines.” Yet it’s a far smaller firm than Yahoo or Ask Jeeves. Mamma.com’s sales totaled $3.1 million in the fourth quarter, compared with Yahoo’s $664 million and Ask Jeeves’ $31.8 million.

Hot as its stock has been, Momma.com would have a long way to go to match the performance of Taser International Inc. Shares of the maker of electric stun guns have soared from less than $2 a year ago to $99.80 now.

Taser is a profitable and growing company, but its market capitalization (stock price multiplied by the number of shares outstanding) is $1.2 billion -- for a business that last year had $25 million in sales.

Taser’s case illustrates the role that short sellers can play in helping to put some stocks on steroids, market pros say.

Short sellers hunt for stocks they believe are grossly overvalued relative to the companies’ prospects. They then borrow the shares (usually from a brokerage’s inventory) and sell them. The goal: buy the stock back at a cheaper price later to repay the loaned shares and pocket the difference between the sale price and the repurchase price.

Short sellers targeted Taser this year. The number of shorted Taser shares soared to 11.1 million in January from 3.5 million in December, according to Nasdaq data.

But as Taser continued to rise in February and March, many of the short sellers scrambled to undo their bearish, and money-losing, bets. And as they buy a stock to close out their loans, short sellers can help to drive the price even higher. That’s called a short squeeze.

The same effect might be helping to drive up shares of San Ramon, Calif.-based IPIX. The stock has rallied from $2.37 on March 26 to $15.50 as of last week. The number of shorted shares had more than tripled from November to mid-March, Nasdaq data show.

IPIX is a small company that is, in effect, trying to start over: EBay Inc. accounted for 87% of IPIX’s revenue last year, but that relationship has ended; EBay stopped outsourcing Internet-imaging technology to IPIX.

Recently, IPIX has created a buzz with a camera system it’s promoting for homeland security use -- for example, to monitor bridges. But whether the system sells remains to be seen.

“We think people see a security opportunity with our product,” said Paul Farmer, IPIX’s chief financial officer, explaining the stock’s advance.

Yet the history of stocks that go vertical in a hurry isn’t encouraging. Some can stay hot for relatively long periods -- like Iomega Corp. in the mid-1990s, an early tech-sector darling -- but in most cases, the bottom eventually falls out.

Many investors may figure these are short-term plays at best. The problem is that everybody has the same thought: I’ll get out long before it ends. Saying it is far easier than doing it.

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Tom Petruno can be reached at tom.petruno@latimes.com.