Penny-Stock Pitfalls Seen in Conolog Surge

SOMERVILLE, N.J. (TheStreet) -- Conolog (CNLG) shares have rocketed 110% higher over the last week on production and order announcements, but the small tech stock is a perfect illustration of why retail investors should be wary of the actions of controlling shareholders and paid-for research coverage.

Conolog investors have enjoyed substantial gains after the company, which makes communications equipment and components, said it completed field testing and started production of its GlowWorm fiber optic detector. In addition, Conolog shares rallied after it received advance orders for its PDR systems and other communications equipment valued at over $1.9 million with deliveries to be scheduled over the next fiscal year.

At face value, the recent surge in Conolog shares from a low of $1.25 on Jan. 22 to a high of $4.72 on Feb. 1 is remarkable. But it's hard for investors to get excited about a stock that has lost 99.9% of its value over the last decade on a split-adjusted basis.

That's because Conolog has approved four reverse stock splits in the last seven years, which puts its split-adjusted price north of $33,000 per share as recently as March 2000. The reverse splits may have been done to satisfy the Nasdaq's minimum bid requirement. Nasdaq issued delisting notices as recently as March and August of 2008.

The Risk of Controlling Shareholders

For investors who may still be tempted to trade on the company's recent surge, Conolog appears to be an attractive play with momentum on its side thanks to the news releases. Share volume on Feb. 1 topped 21 million as the stock nearly doubled in price, compared to the 50-day average daily volume of only 700,000.

But investing in a company with a controlling shareholder has its pitfalls, exemplified on a bigger scale by Revlon (REV). A group of shareholders is suing 79% stakeholder Ron Perelman after the stock jumped after a surprisingly strong earnings announcement in October, just weeks after Perelman acquired nearly half the company's common shares in exchange for retiring a burdensome debt. The situation illustrates how controlling shareholders will usually get what they want, The Wall Street Journal opined this week.