NEW YORK (TheStreet) -- Celebrities will partner with small-cap companies in exchange for cash equity or shares. C Squared shows you how this can positively and negatively affect a stock and how you should, or shouldn't, trade it.
With these "famous partners" onboard with the company, millions of fans who don't know much about stocks, but know a great deal about the celebrity, immediately trust the celebrities' endorsements. Fans buy into what product/stock the celebrity is promoting and voila -- you get a pumped-up celebrity stock.
The difference between a CEO coming on to CNBC, and Justin Bieber promoting a company is, the audience and share structure. The CEO comes on and talks value, strategic future moves for the company, typically to a savvy and financially sound audience. The celebrity celebrates the company and its products to millions of fans who are not market experts; this produces a buzz.
The share structure difference between Ford , and let's take my last pick Goff , which I called out as a fake before it crashed, is simply the amount of shares outstanding.
Ford stock has 4 billion shares outstanding, so it would take massive demand and volume to move this stock at all after the CEO talks about the fact that their bonds are depression-proof.
Penny stock GOFF has 286 million shares traded, so if thousands of fans purchase the cheap, and easily affordable, 15-cent equity, hoping this is the next hottest item to earn them some quick cash, the stock can move 400% in days. However, as easily as the stock can go up, it can crash 90% within days -- typical for all hype-driven stocks that lack real demand.
Tiger woods is hot right now after playing well at The Masters, but not as hot as golfer Adam Scott. At the end of 2011, Tiger "partnered" with a company, Fuse Science OTCQB , a stock with 230 millions shares outstanding. The stock soared from 30 cents to the $1.20's; then it crashed, leaving many bag holders and poorer traders. It seems that they may be getting ready to promote it again soon. You can see this 2011 video of Tiger Woods mentioning his partnership with Fuse and compare it to a chart to get a better impression of how it soared and then crashed!
In March 2013, Bloomberg's "Taking Stock with Pimm Fox" featured FUBU and "Shark Tank's" Daymond John with the CEO of Fuse Science. In this segment, they mentioned that several big announcements were coming, and the chart looks ripe and ready to go, but I wouldn't advocate going long on a piece of junk like this.
As an experienced trader, knowing this stock could fly, I'd make sure to get out quick on the pops, if I was long! You can really bank on both sides of this trade if you monitor it carefully. If the volume is cranking up, then it may be time for it to go.
If you still want it, be very careful buying into the hype, because real demand must be there for support. If this stock rises hundreds of percentage points, it will turn the company into a "multi-million dollar" enterprise. However, Yahoo! Finance shows that they only do $145,000 in revenue per year, with a negative -5,800% operating margin, and a zero book value.
Want to see some crazy backward numbers? Click here then select the first link and scroll down to the page 35 and keep scrolling a few pages.
The market cap is at 35 million. If the stock runs to $1.20 again, that puts the market cap at $140,000,000; It would take a 1,000% increase in sales to even come close to matching the ridiculous valuation being put on the stock, if it runs that high again.
If you are an avid trader, then DROP could, potentially, be a great trade. But if you're not, never invest in these types of companies. If you are still thirsty for Fuse, do not buy into the hype or the stock spiking day after day, only to find yourself holding the proverbial bag as the stock crashes.
Remember, most OTC and pinksheets stocks are garbage (said with a French accent)!
--Written by Ben Brinneman in Charlotte, NC, owner of C Squared Trading, which teaches how to trade legitimate "penny stocks," priced between $2 and $10.
At the time of publication, the author held no positions in stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.