The Five Dumbest Things on Wall Street This Week

1. Ripped Off From Today's Headlines

Marv, the curmudgeonly chairman emeritus of the Five Dumbest Things Research Lab, overflows with good advice about dodging bad investments.

Stay away from tech companies based in Fort Lauderdale, warns Marv. Avoid stocks with cutesy ticker symbols. And never, ever invest in a company with a product demonstration that makes you say, "Cool!"

Yes, as Marv constantly reminds us, the road to poverty is paved with awesome demos.

"A machine that lets you rewind TV shows and skip commercials? Cool!" That's the kind of reaction that gets you buying TiVo (TIVO) for $70 a share. (It's now around $10.) Cool demos are exactly what caused people to lose millions in palm-sized computer manufacturer Handspring (HAND) (once above $100 a share, now trading for a buck), interactive TV pioneer ACTV (IATV) (peaked at around $50, acquired for $1.10) and countless other tech companies.

Products that make you go "Wow!" come from stocks that make you go "Ow!" says Marv. It's not fair. But it's just how it is.

Which brings us to American Technology Corp. (ATCO). We haven't experienced a demo of ATC's flagship product firsthand, but apparently it's a doozy. See, ATC makes a speaker system that directs sounds in a beam as precise as the light emitted by a laser.

Cool stuff. As USA Today reported in a big story about ATC in May, the potential applications of the company's HyperSonic Sound are mind-boggling. Imagine an in-car HSS system that could play one CD for Mom and Dad up front and a different one for the kids in back. Imagine in-store audio advertisements for Duracell heard only by whoever is standing in front of the battery display. "Rarely is an invention so unique, so visceral and so simple that in 15 seconds most people who experience it realize it could alter everyday life," wrote USA Today's Kevin Maney.

Which gets us to the part about loving the product but hating the stock.

See, as soon as Maney's article hit the streets, people started buying up ATC's stock. And how. In one week, ATC's shares -- which had spent the first part of 2003 bouncing between $3 and $4 -- doubled to $6.39. (Shares closed at $6.07 Thursday.)

So somebody must love this stock. But not everybody. Only this past Monday, for example, ATC registered for sale 2.3 million shares and warrants of the company. It's not ATC that will be selling these securities, though. The stock and warrants will be coming from the institutions who bought them in July in a private transaction.

As a short-seller of ATC stock pointed out to us recently, aspects of this $10 million institutional sale set off alarm bells that might scare investors away from the stock. Among them are the 450,000 warrants issued in the deal -- warrants that have an exercise price of $6.75 but could easily be adjusted downward should ATC issue any stock at lower prices.

And will ATC ever have to do that? Well, as Maney noted, HSS is years away from becoming mainstream. In the meantime, the company had $2.7 million in negative cash flow from operations for the six months ended March 31, and it estimated, before the $10 million July financing, it would need $2 million more to get through the next 12 months.

Even if the company doesn't have to issue more stock, the threat of dilution to current shareholders appears substantive.

As of May 1, the company had 15.2 million common shares outstanding, giving ATC a market capitalization of $92 million. Taking into account preferred stock, options and warrants (most of which appear to be well in the money), and the newly issued stock, we figure there's effectively 23.5 million shares outstanding, giving ATC a market cap of $142 million. (Calls to ATC to check our math and ask other questions weren't returned.)

That for a company that lost common stockholders $2.7 million on revenue of $237,000 in its latest quarter.

There are other little things that bug us. e.Digital (EDIG), a company founded by ATC Chairman Woody Norris that shares office space with ATC -- plus at least one executive -- is trading at 32 cents a share these days, down from $20 in 2000. (Norris, the inventor of HSS, is also busy selling minihelicopter technology via another company called AirScooter.)

Plus, there are the press releases -- announcements that are the truth, though perhaps not the whole truth. In February, for example, the company noted that ATC's new CEO, Jim Irish, came from a recent stint as CEO of ValuMedia LLC, "where he successfully launched numerous new media and promotional products." True, but as we learned from ATC's subsequent proxy filing, ValuMedia filed for bankruptcy in February 2002.

Our other favorite press release: The one in March announcing a new, six-division corporate structure "to streamline operations and provide scalability for growth."

This for a company with about 30 employees! How much division-structuring, streamlining and scalability can it need?