Tracing Vertical Computer's Nearly Vertical Rise and Fall

It's not every day that you see a 20-for-1 stock split. More unusual still is a 20-for-1 split on a stock that's trading around 12.

But just this month Vertical Computer Systems (VCSY Quote), a provider of multilingual Internet services whose shares trade on the thinly regulated over-the-counter bulletin boards, undertook just such a split. The split came amid a two-month trading frenzy that saw volume regularly exceed 20 million shares and the stock rocket from mere pennies (on a split-adjusted basis) on New Year's Eve to a postsplit 6 1/8 last week, before swooning below 2 Tuesday.

Vertical Computer's brilliant but short-lived rally speaks to the return-chasing psychology of the individual investor and to the outsize demand for Internet plays of any sort. And the stock's increasing prominence on Internet message boards also illustrates the power of public-relations efforts targeting bulletin board investors, who happily take fliers on cheap shares knowing they can quickly pick up momentum -- and just as quickly come crashing back to earth. Tuesday the stock slid 29% to 1 17/32.

Vertical Goes Vertical

The appeal of Vertical Computer lay not in strong financial results or big contracts with important customers. Indeed, the company hasn't released any financials and isn't required to, as companies whose shares trade on the bulletin board face few regulatory requirements. What Vertical has done is showered the investing public with press releases detailing its every move through a Fort Lauderdale, Fla., public-relations firm called the Hawke Group.

"We know that the more information we make available to the market, the more likely it is that the market will react favorably to the company," the firm declares on its Web site, www.hawkegroup.com. Hawke Group, which also represents bulletin board companies International Internet (IINN Quote) and WOWStores.com (WOWS Quote), didn't return emails and calls seeking comment.

The Hawke Group has issued 10 Vertical Computer press releases in the last two weeks. A recent release reveals that the company hired an auditing firm, BDO Seidman, to help take its stock to the "Nasdaq or the American Stock Exchange." Last Thursday, Vertical Computer received $3.5 million from Avenel Financial Group, a private venture capital group that has invested in Zebramart.com, an online luxury club. Avenel didn't return calls seeking comment.

With data such as financials unavailable, some money managers can't quite believe the move Vertical Computer shares have made. "Companies like Vertical Computer aren't even trying to generate revenue or earnings anymore," says Scott Fearon, president of hedge fund Crown Capital Management, which has no Vertical Computer position. "They are just out there trying to generate news." Vertical Computer's spokeswoman, Cynthia Mandel, says the company is looking to improve its marketability and profitability around the world through partnerships.

Why the Blanket Approach

Of course, just generating news can pay off big for companies that show up on investors' radar screens, says George Schlieben, publisher of Global Penny Stocks, a micro-cap online newsletter.

"The whispering on message chat boards about even the smallest, most speculative stocks is becoming pretty persuasive and a bit scary," says Schlieben.

As Vertical Computer began flying, shareholders on Silicon Investor's Vertical Computer discussion board became cheerleaders. "This has been one of the wildest rides I have ever been on!" wrote a chatter named early player on Feb. 16 "I just sold enough to ride this wave on free shares! GO VCSY!!! GO."

Of course, the party couldn't go on forever. By last Thursday, Vertical Computer's shares began falling -- fast. "Poor Nancy, the big fall!!!" wrote Lord Ernie on Silicon Investor to fellow chatter Nancy McKinney. By Friday, with Vertical Computer's stock off its highs by 50%, McKinney weighed in. "Selling and buying back in will keep the price jumping around for a while, I think. After this, who knows?" wrote McKinney Friday morning. "I just hope today is not the day for the big fall, but I've never seen a stock act like this, at these volumes."

One Vertical Computer shareholder, at least, remains optimistic. "I think this is hungry and growing young company in a crowded field," says Ed Diaz, a regular on the Silicon Investor thread for Vertical Computer. "The key is execution and Vertical Computer may be able to execute a little better. These are my gut feelings." Diaz, who points to profit-taking for the last week's drop, says he now owns 5000 Vertical shares at an average of 4.30 apiece. But with the stock sliding toward 1, how long the optimism will last is anyone's guess.