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PDFTo be sure, records indicate, RedChip once enjoyed a solid reputation and boasted a long track record decorated with homerun calls on Starbucks (Nasdaq: SBUX) and other stocks that would later become major hits on Wall Street. But the RedChip credited with discovering Starbucks back in 1992, when it reportedly issued the first-ever independent research on the legendary coffee chain, is not the same RedChip that makes its money by touting the likes of L&L Energy (and all kinds of obscure penny stocks) today.
Since changing hands in 2005, records show, RedChip has transformed itself into a full-blown “investor relations” machine that caters to microcap companies hungry for big stock gains and willing to pay for the well-spun hype that tends to deliver them. So while its history may still serve as a handy selling point, critics say, RedChip bears little resemblance to the old-fashioned research firm that made a big splash with its early call on Starbucks – and made its living by selling its reports to paid subscribers – beyond its name and the fading credibility that’s still attached to it.
Even so, as its debate with CNBC clearly shows, RedChip likes to milk those leftover assets as much as it can. The firm rushed to trumpet its past on “The Strategy Session” earlier this month and, when hosts Herb Greenberg and David Faber refused to listen, kept singing the same song in two defiant rebuttals with screaming headlines – “CNBC’s Irresponsible Innuendo” and “Walking into a Buzz Saw on CNBC’s Strategy Session” – posted on its website since that time.
RedChip had already caught TheStreetSweeper’s attention before its heated contest with CNBC first erupted, due to the firm’s heavy focus on the same risky microcap arena that has sparked many of this website’s investigative stories. In fact, TheStreetSweeper had just published a big article on L&L Energy – exposing numerous red flags at the company and highlighting RedChip’s celebration of the stock – hours before CNBC and RedChip began their memorable on-air argument.
L&L began sinking after TheStreetSweeper story appeared and, with CNBC questioning RedChip’s endorsement of the company during a noon broadcast, took additional hits throughout the day. A $10.27 stock before that, L&L hascontinued to lose ground since that time – hammered most recently on news of a CFO change – and, for the first time in months, now fetches less than $8 a share.
Meanwhile, records indicate, L&L quietly severed ties with RedChip after that partnership – once so valuable – seemed to take a heavy toll on its stock. Last Thursday, records show, L&L officially canceled its contract with the embattled publicity firm.
RedChip clearly lost a star client in the process. Before that, the firm treated L&L like its current version of Starbucks. It classified L&L as perhaps the best investment – with the highest rating (strong buy) and price target ($17) – in the group of companies that pay for its services.
That said, RedChip likes almost every company on that list. It has buy recommendations on the vast majority of them (more than 90%), with hold recommendations on just two and outright sell ratings on none at all. It reserves most of itscautious calls – and all of its sell ratings – for companies that do not give it cash and/or stock for the publicity that paying clients count on the firm to bring.
TheStreetSweeper contacted RedChip last week, seeking input for this story, but learned that Gentry had left the country for an extended business trip. It then emailed Gentry a long list of detailed questions (available here) and is still waiting to hear back from him at this point. It will happily share those responses if and when it ultimately receives them.
A Black Eye for RedChip
RedChip adopted its current business model – sparking immediate criticism – when it first changed hands about five years ago.
At the time, records show, current RedChip President Dave Gentry had already spent several years operating an investor relations firm that catered to the same type of small-cap and microcap companies that RedChip warmly embraces today. Following earlier stabs at far different careers, including teaching (his degrees are in education) and politics (his run for Congress failed), Gentry had finally found his niche. He ran a growing public relations firm, theAurelius Consulting Group, and saw RedChip as a choice vehicle that would allow his business to expand.
His strategy soon came under fire, however, from a rival that liked the old RedChip and instantly noticed the change.
“RedChip Analytics, for over a decade one of the most respected subscription-based providers of research on smaller public companies that had little or no coverage, has undergone a change of ownership, change of location, slight change of name to RedChip Independent and a change of policies and standards that has raised some questions and concerns in the analytics community,” proclaimed FinancialWire, whose parent company had actually hoped to acquire the valuable RedChip brand for itself. “What is called RedChip Independent research, published by RedChip Companies Inc., may not be so independent at all …
“While the RedChip.com website soliciting subscribers may not be so transparent,” FinancialWire continued, “the reports themselves do disclose that RedChip is now an affiliate of the Aurelius Consulting Group and that some companies covered, such as I/O Magic (then a $5 stock that now sells for about a quarter a share), are clients of Aurelius” that pay for the publicity they receive.
FinancialWire then filled pages with potential evidence of ethical violations and financial conflicts before finally completing its scathing review. RedChip fought back with legal threats, records show, but FinancialWire responded by largely standing behind its original report. Nevertheless, RedChip escaped from that early attack (staged in late 2005) relatively unscathed and spent the next five years building the firm into the successful – but still controversial – operation that it is today.
Red Chart, Green Leader
The year after it changed owners, records show, RedChip quickly caught the attention of MarketWatch following a huge jump in the stock price of a company that had hired the firm.
In the fall of 2006, MarketWatch observed, Left Behind Games (OTC: LFBG.OB) had seen its stock more than double – rocketing from $2.50 to almost $6 a share – shortly after RedChip showcased the company at an investor conference. At the time, that article shows, RedChip saw plenty of reason to cheer.
“One week after the conference, the stock traded a half-million shares and doubled,” Gentry marveled in the story. “Somebody out there thinks this was a great buy.”
RedChip itself had delivered that bullish message, records show, originally initiating coverage on LFBG with a strong buy rating and an $18.70 price target on the shares. But LFBG had already neared its peak at the time of that article, records indicate, and RedChip would later slash its price target to just $2.60 a share before dropping its coverage of the stock altogether in late 2008. LFBG fetched less than a nickel by then, records show, and now looks basically worthless with its stock currently trading for a fraction of a penny a share.
Meanwhile, records indicate, RedChip has long since banked the $30,000 it received from LFBG for orchestrating a so-called “visibility research program” for the company – which included its bullish stock reports – and shifted its focus tonewer clients with more money in the bank and more valuable stock to cover its fees. It has also picked up a newdirector for its equity research department, who arrived with just four months of relevant experience, along the way.
Like Gentry, records indicate, Matthew Kantrowitz originally planned to pursue a career outside the financial arena before landing at RedChip and finding his real calling. Initially, his LinkedIn bio states, he enrolled in college as a film student but soon found himself “wanting more math and logic” in his studies instead.
“I switched my major to finance,” his bio states, “and never looked back.”
By then, records indicate, Kantrowitz had gotten an early – if brief – taste of the business that would ultimately become his career. In mid-1999, his bio shows, Kantrowitz landed a summer internship at RBC Dain Rauscher (then known as Gibraltar Securities) – a firm tainted by the recent fraud conviction of a former longtime broker – and spent the next few months gathering the limited industry experience that he would carry to RedChip when assuming his current post.
Kantrowitz never really focused on stock research at Gibraltar, his bio indicates, charged instead with the menial tasks of researching interest rates and certificates of deposits while lending occasional assistance to the firm’s trading desk. After that, his bio shows, Kantrowitz spent seven years securing undergraduate and graduate business degrees from the University of Central Florida before surfacing at RedChip and reentering the workforce.
Painting a Pretty Picture
For its part, RedChip has painted a more impressive picture of its stock-research director. In the carefully worded bioposted on its website, RedChip states that Kantrowitz began his finance career as a “junior research associate” (rather than a summer intern) at Gibraltar and then secured his business degrees while gaining valuable experience never mentioned in his own LinkedIn bio.“Matt owned and operated a private retail business,” the RedChip bio states, “where he oversaw finance and operations and developed marketing strategies.”
Either way, records indicate, RedChip hired a recent college graduate with (at best) limited experience in the investment arena to oversee its equity research business. Despite his thin resume, records suggest, RedChip then assigned Kantrowitz more responsibility than some veterans could handle.
“I manage the research department and oversee the production and publication of approximately 200 equity research reports per year, four quarterly RedChip Review magazines and additions/deletions to the RedChip Independent Index of small and microcap stocks,” Kantrowitz states in his Linkedin bio. “I also write fundamental action-oriented research on a variety of micro/small-cap listed companies on the NYSE (New York Stock Exchange), Nasdaq, AMEX (American Stock Exchange) and OTC BB (OTC Bulletin Board).”
Less than six months after joining RedChip, records show, Kantrowitz actually picked a winner. He slapped a buy recommendation on Sharps Compliance (Nasdaq: SMED) -- a company later covered in an investigative report on this website – and predicted that the $2 stock would basically triple in price.
As it turns out, the stock fared even better. Thanks to a surprising contract with the federal government (which few, including Kantrowitz, could have anticipated), records show, Sharps shot past Kantrowitz’s $6 target the following year and later jumped from the OTC Bulletin Board to the Nasdaq to boot. Still gathering steam, records show, Sharps went on to reach an all-time high of $13 a share – more than double Kantrowitz’s original price target – by the time that 2009 came to an end.
To his credit, records indicate, Kantrowitz cooled on Sharps after that big explosion. Less than a month after Sharps hit its peak, a past Reuters article reveals, Kantrowitz had cut his rating on the stock from buy to hold (and later dropped it to an outright sell) while predicting – quite accurately – that the company would need to land another giant contract in order to generate the kind of “super growth” that had fueled its recent rally. Still waiting for its second jackpot more than a year later – and hammered by TheStreetSweeper’s investigative report in the meantime – Sharps has since plummetedto less than $4 a share.
In this case, at least, RedChip delivered the right calls and helped investors who followed its advice. However, records indicate, RedChip never counted Sharps among the paying clients that hire the firm to publicize their companies and attract investors to their stocks. Kantrowitz treats those companies a bit more generously, records indicate, either assigning them buy ratings (with L&L as a prime example) or no ratings at all.
Image of Past Failure
In RedChip’s official disclosures (available by clicking on the “Disclosures” link at the bottom of its homepage), RedChip lists roughly three dozen companies that have paid the firm – with cash or stock or a combination of both -- for publicity campaigns.
While lengthy, records show, that list would virtually double in size if it included past clients that RedChip no longer serves. Of those 35 former clients, all but a handful trade well below the $1 mark. Most fetch less than a quarter, including a dozen that have fallen below a penny or seemingly vanished into thin air.
Packed with obscure companies, the list does feature one familiar name. In 2008, records show, RedChip added Imaging3 (OTC: IMGG.OB) – another future target of TheStreetSweeper -- as a client and promptly initiated coverage of the stock with a “speculative buy” rating and a target price of $1.05 a share.
At that time, records show, IMGG sold for 13 cents a share and had rarely fetched a quarter – and never approached a dollar – during its entire history as a publicly traded company. To hit RedChip’s lofty target, IMGG would somehow need to stage a massive rally – with its stock rocketing 700% -- unlike anything the company had ever seen.
Nine months later, however, IMGG had lost half of its meager value and sunk to just 6 cents a share instead. At that point, records show, RedChip cut its rating on IMGG to hold – withdrawing its faraway price target -- and soon followed up by dropping its coverage of the company altogether. RedChip walked away from the deal $32,400 richer, records indicate, leaving behind a stock that hovered near its all-time low.
If RedChip helped investors with its spot-on coverage of Sharps, issued without the influence of generous fees, the firm failed miserably when it came to IMGG. After RedChip dropped its coverage of IMGG, its fee cutting the company’s small cash balance by a third, the stock finally exploded.
Abandoned by RedChip at 7 cents in early 2009, records show, IMGG went on to hit a record near $2 a share – almost double RedChip’s original target price – before the end of the year. IMGG later collapsed, records show, without RedChip warning investors (as it had with its independent coverage of Sharps) in advance.
As a brand-new website, with no financial conflicts, TheStreetSweeper stepped forward and sounded the alarm instead. Those who listened escaped the painful losses that followed, as IMGG plummeted almost 90% -- wiping out $460 million in market value – to its current price of just 16 cents a share. Remarkably, even after that nosedive, IMGG still fetches more than twice the price it did at the end of RedChip’s long-forgotten publicity campaign.
Ugly Track Record
TheStreetSweeper originally planned to examine every company still included on RedChip’s list of paying clients, as well as the price moves and business developments reflected in their stock charts.
RedChip lists those companies by name in alphabetical order, (found by clicking the “Disclosures” link at the bottom of its homepage), followed by requisite disclosures about the cash and/or stock that it received from each one. Those summaries by themselves, covering payments from 35 different companies, fill 20 full pages and still don’t shed much light on the performance of the stocks and the events that shaped their charts.
So TheStreetSweeper set out to fill in the blanks with some research of its own. It spent the equivalent of two full working days on this ambitious task but finally gave up after making it less than halfway through the alphabet. (It wound up stuck for hours on the letter “C,” because so many of those companies use “China” – an instant eye-catcherin the speculative growth arena – as the first word in their names.) It ultimately decided to abandon the project after finishing its examination of L&L Energy, the 20th and most familiar name on the list, by then spotting a pattern that (with an occasional exception) seemed destined to keep repeating itself.
In a nutshell, the story tends to go like this. A public company, often fairly new (with “China” in its name!) or past its glory days, hires RedChip to execute a visibility campaign designed to spark investor interest in its stock. The company gives RedChip a generous cash payment (usually five figures), often supplemented with additional monthly payments, for its services. In many cases, the company gives RedChip a fair chunk of stock as well. Occasionally, a company might choose to cover RedChip’s entire fee with its stock instead. After that, the company then waits for big stock gains that generally prove to be unsustainable and sometimes never materialize at all.
Meanwhile, if the IMGG case serves as any guide, RedChip banks its fat paychecks and later moves on to more promising clients. In other words, the firm’s track record suggests, RedChip ultimately fares much better than its clients and those who buy and hold their stocks.
By now, records indicate, RedChip has apparently lost the respect of some former fans – including past clients of the firm – along the way. Earlier this month, in a popular stock chat-room focused on L&L Energy, the former CFO of a past RedChip client offered a troubling review of the busy firm and its controversial services. Based on his own experiences, the CFO concluded that RedChip accepts more clients than it can reasonably handle, produces research that’s of “suspect” quality and suffers from a poor reputation with institutional investors that winds up tainting the firm’s clients in the institutional community as well.
He portrayed L&L Energy as the latest victim of that fallout after watching CNBC grill RedChip’s leader about the firm’s paid touts of the company two weeks ago.
“I had my wife – who knows nothing of (CNBC’s) Greenberg, (RedChip’s) Gentry or LLEN – watch the interview,” he wrote the day after the television program aired. “Her response,” he declared, “was, ‘Please tell me I don’t own any stock in that company.’”
Snapshot of a ‘Winner’
At that point, compared to most RedChip clients, L&L Energy still looked like a rare homerun.
RedChip first added L&L as a client in early 2009, records show, and formally initiated coverage of the company’s stock – then trading at $1 – a few months later with a buy recommendation and a $5.55 price target on the shares. L&L had achieved about half of those gains by mid-2009, records show, when RedChip collected the first (and biggest) reward for its assistance. Specifically, records show, RedChip picked up 80,000 shares of L&L stock – 30,000 of them free-trading – as payment for its powerful publicity campaign.
At its peak the following spring, records show, that stock would be worth almost $1.2 million.
After nailing down its share-based fee, records indicate, RedChip grew increasingly bullish on L&L as the stock recorded increasingly impressive gains. When RedChip saw L&L achieve its original price target in November of 2009,records show, the firm simply reiterated its buy rating and jacked its price target up to $10 a share. As the year drew to a close, records show, RedChip then followed up by presenting L&L with an “Elite Company” award in recognition of the stock’s spectacular performance.
By April of 2010, records show, L&L had soared right past RedChip’s new price target to reach an all-time high of almost $15 a share. Notably, records show, L&L CEO Dickson Lee sold 200,000 shares of company stock – valued at more than $2 million on the open market – in a private transaction executed just weeks after the stock achieved that record-breaking high.
While L&L had already peaked at that point, records show, RedChip continued to follow up with several bullish calls that pegged the value of the stock as high as $30 a share. Meanwhile, its disclosures show, RedChip picked up another 15,000 shares of L&L stock as payment for its services.
Once RedChip pocketed that second fee last July (with the stock now below $9), records indicate, L&L struggled topull off a rally that could deliver lasting gains. As a result, those records further suggest, RedChip followers who acted on the firm’s latest string of L&L calls – buying and holding the shares – are still waiting for their returns. At this point, records show, those who bought L&L at its peak have seen the value of their stock cut by almost half.
Meanwhile, records indicate, L&L’s top executive has cashed in on yet another private stock sale that (based on market prices) delivered seven-figure gains. Last month, records show, Lee again sold 200,000 shares of L&L stock valued at more than $2 million in a particularly well-timed transaction.
Moreover, records show, the CEO’s brother Robert Lee – who serves on the company’s board – pocketed roughly $2 million through recent stock sales as well. He sold big chunks of L&L stock on the open market in both December and January, records show, with the shares priced in the double digits on both occasions. L&L fell into single-digit territorya few days after that second transaction, records show, and has remained firmly stuck there – losing additional ground – since that time.
As noted earlier, L&L finally parted ways with RedChip last week following the stock’s most recent plunge.
Colorful War of Words
Despite everything, RedChip continues to portray itself as an accomplished research firm with a proven record of helping investors make money. While under fire by some big-name critics, RedChip has simply cranked up the volumeon its familiar story in attempt to drown out those -- including veteran journalists at CNBC – who have accused the firm of engaging in deceptive business practices that hurt investors instead.
To carry its message, RedChip has relied on its own in-house “superstar.” RedChip analyst Bill Matson, an industry veteran who focuses on small-cap and microcap stocks, has boasted in the past about delivering even bigger gains than Warren Buffett and “besting the Sage of Omaha” in the process. This month, in a fierce defense of RedChip, Matson essentially suggested that CNBC’s recent warnings could hurt the public’s chances of finding stocks that promise that same kind of success.
“I wonder if you people at CNBC have any appreciation of the harm you cause when you attempt to create the illusion of scandal where none exists,” Matson stated in a letter to the hosts of “The Strategy Session” now posted on the firm’s website.
“While I respect CNBC’s reluctance to avoid mention of specific thinly traded stocks, I find it disturbing that you would not only ignore the outperformance of microcaps but also take actions – such as your irresponsible treatment of RedChip – that are likely to steer would-be investors away from small companies … It is particularly irresponsible at this time,” Matson concluded, “to illegitimize without basis an effective means of channeling objective analysis of these companies to investors who are likely to benefit from this information.”
* Note: No member of TheStreetSweeper's staff or advisory has ever taken a financial position in the stocks mentioned in this story or received any compensation from others with investments (short or long) in those companies. As editor of this website, Melissa Davis will never take a financial position in any of the stocks that she covers. To contact Ms. Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
