Intertainment: When a Stock Goes Viral

Every so often, a tiny company posts news that send traders into a frenzy. These penny stocks soar hundreds of percent in a matter of days making early investors very wealthy. Volume could jump from as little as 25,000 to 100 million, as traders get a little envious and want in on the price action. This is what we're seeing with Intertainment [INT:TSXV], the next penny stock that just went viral.

The stock went from being worth a dime a share to over $3 in less than three months, but the move was not a nice steady line most value investors look for, it was a bumpy three months where price action occurred at the start of February and just this week, a gap of ten weeks. And those who bought it the first time it went exponential would have seen themselves buying into massive exuberance, often irrational, followed by roughly half their investment wiped out in two days. If they had waited ten more weeks, they would have seen their investment, or more accurately, gamble, grown to almost three times their original purchase.

Of course, having worked in the investment industry for years, I know that those who bought near the highs are often not sophisticated traders and were buying into the hype. Eventually, these traders will get burned (as we've already seen today alone). As well, their level of patience is no where close to a fund manager or a value investor who might wanna wait it out.

Historically, penny stocks that make major moves and go exponential eventually succumb to reality. Earlier in the year, rapper 50 Cent tweeted about a stock called H & H Imports [HIHN:OTC], sending the stock up ten times its value in days. Several weeks later, it had another bullish move, sending it to $1.75. The stock was 4 cents before the tweet. Where is it now? 73 cents. That's about 40 per cent from its highs obtained when five million shares moved it up in March.

Last year, Electrovaya [EFL:TSX] had major news and went from under $1.00 to over $4.00 in just over a week. Volume surged to over 6 million from just a few thousand per day. Where is this stock now? $2.12.

Before that, there was Resverlogix [RVX:TSX]. It almost tripled from about $3 to $8 in a few days. The stock today is at its lowest point in the last three years, $1.97.

And one final example, Weststar Resources [WER:TSX], a stock I sadly own, and bought at the start of my trading days. The stock, which has done a reverse stock split last fall, went from $2 to $14 (it was actually about 15 cents to $1.10 pre-split) only to have fallen from grace as well. Today, it is 95 cents, and was as low as 17 cents in the summer.

If there is any lesson in this, it's that if you have never heard of the company before it went viral, your best bet is to stay the heck away from it. Most traders are unable to short against the hype, which I have done to two of the stocks above. The truth is, Intertainment will be a long, forgotten stock by the end of April whose securities will probably be sitting in someone's account, along with Nortel, Weststar, and the rest.