Penny Stock Hitches Ride on DoubleClick's Rocket

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Call it the anatomy of a rumor: Volatile penny stock

Zulu-tek

(formerly called

Netmaster Group

) (NETZ:OTC BB) rose more than 110% Monday on massive volume and an endless flow of Internet chatter, fueled by the company's denial of a rumor no one remembers previously having heard.

The rumor was that

DoubleClick

(DCLK:Nasdaq), an Internet advertising company that held a highly successful initial public offering Friday, was looking to buy Zulu-tek, a similar Internet ad agency. In a press release sent out Monday, Zulu-tek denied the speculation and claimed to have been "deluged with calls regarding the rumor."

"I don't know how much truth there is in the company's claim" that prior to the press release there was a rumor about it being acquired by DoubleClick, said Matt Gregg, a private investor who has bought into Zulu-tek. "I think the company just wanted a reason to put out a press release comparing themselves to DoubleClick."

Zulu-tek officials at the company's Newport, R.I., headquarters and at its investor relations firm,

Wall Street Equities

, did not return phone calls. (Indeed, one speculator in the stock said he had heard the company was in a "quiet period" -- however, the company does not have any outstanding public filing. "They're just not returning phone calls," the investor explained.) A DoubleClick spokeswoman said the company is in a quiet period surrounding the IPO and thus, had no comment on the rumor.

Shares of Zulu-tek rose about 21 cents on the OTC Bulletin Board to around 40 cents on about 4.4 million shares traded, according to data tracker

ILX

. The stock has drifted down from $1 since it was listed in August 1997. By contrast, DoubleClick has soared more than 75% in only two days of trading since going out at 17 Friday, reaching 30 in trading Monday.

Whether the acquisition rumor was true or not, the situation with Zulu-tek shows how easily the Internet can be used to disseminate hype, specifically hype concerning penny stocks. It is also the latest example of the inherent dangers of penny stocks, which fly under the radar of most traditional media, analysts and even regulators.

The gyrations are reminiscent of

Comparator Systems

(IDID:OTC BB), a Newport Beach, Calif.-based fingerprint identification systems maker. Comparator zoomed in three record-breaking days of Nasdaq trading in 1996 from a few pennies to $1.87 per share. It crashed just as spectacularly, leaving some investors holding about $3 million in losses. The stock was delisted by Nasdaq, and now exists in the netherworld of the pink sheets, last trading for about a half-penny per share.

Although it was uncertain how concerted an effort was being made or by whom on behalf of Zulu-tek, it seemed strange that the company would issue the press release it did, just one trading day after DoubleClick went public. Indeed, this story was first brought to the attention of

TheStreet.com

this morning by an enthusiastic email -- all in capital letters -- encouraging us to "tip off" investors about this company. "Let others know and you will help us all out!"

If Comparator Systems is any guide, investors should tread extremely carefully when moving among the little-watched world of penny stocks.

Monday's press release from Zulu-tek went on to compare its sales figures of $39 million in 1997 to DoubleClick's $30.6 million for the same period, as well as touting Zulu-tek's client list, which reportedly includes

Microsoft

(MSFT) - Get Report

,

IBM

(IBM) - Get Report

and

Netscape

(NSCP)

.

Zulu-tek was formed as Netmaster Group via a reverse merger of

Star Medical

and

EchoMedia

, a privately held Internet advertiser, and in December acquired 65% of

Softbank Interactive Marketing

for an undisclosed sum.

Undisclosed apparently is a key word in the Zulu-tek vocabulary. The company has released almost no financials, although it has been a public company for six months now, making it highly difficult to confirm the company's sales figures. Its only publicly known numbers are from its premerger days, which show virtually nonexistent sales and negative earnings. At last report, the company has about 30.3 million shares outstanding, with about 60% held by insiders. The company changed its name to Zulu-tek earlier this year.

However, none of this murkiness seemed to be deterring day traders and speculators. The stock was trading actively, and its name was lighting up the boards of several Internet chat rooms. The flow of conversation seemed mixed, although those predicting big things for Zulu-tek had difficulty answering some questions tossed out by critics. For example, why has the company not posted any numbers? Or, why has no one else heard the DoubleClick rumor? Or -- and perhaps most damaging -- if Zulu-tek was indeed as good a company as DoubleClick, why was its stock worth only a few cents?

This is also not the first time Zulu-tek has attracted the interest of penny-stock gamblers. About a month after the reverse merger, the stock similarly spiked on heavy volume, getting as high as 48 cents, after the company announced several client agreements.

"This is looking suspiciously like trading Nov. 17-19, 1997. The prices AND volume identical almost

sic. What has changed since then?" wrote one participant in a

Silicon Investor

chat room Monday.

Other participants pointed out that in the world of penny stocks, it may not take a lot of buying to push the price up. A trade of $1,000 could move the price by as much as a dime, one emailer claimed.

Still others were more skeptical. "The stock went out at $1 six months ago, anyone still holding that may want to bump the stock and get out," said one arbitrageur who was avoiding the situation. "It smells too much of manipulation to me."