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Would You Pay US$4.29 Billion for a Company with No Assets and No Revenue?

Ser Jing - When Dividends Become Dangerous Attractions (pic)

There’s a company called CYNK Technology trading in the US share markets that has a market capitalisation of US$4.29 billion as of 9 July 2014 at a price of US$14.17 per share.

The company apparently runs a business called introbiz.com, which allows its users to access its marketplace. Through that, users “may both buy and sell the ability to socially connect to individuals such as celebrities, business owners, and talented IT professionals.”

In a nutshell, it seems like CYNK Technology is a social networking company, akin to perhaps Facebook or LinkedIn. Given that both companies have market capitalisations of US$170 billion and US$19 billion, respectively, it might seem that CYNK Technology’s ‘value’ as a company is probably not entirely out of whack.

But, there’s a huge difference between CYNK Technology and the other two social networking outfits. While Facebook and LinkedIn earned revenues of US$8.92 billion and US$1.68 billion, respectively, over the past 12 months, CYNK Technology had no revenue. While Facebook and LinkedIn have total assets worth US$19 billion and US$3.56 billion, CYNK Technology had assets worth zilch. Zero. And interestingly, the share actually climbed by 24,416% between 17 June 2014 and 9 July 2014 – that’s three short weeks!

There’s a famous quote in investing circles that’s popularly attributed to Benjamin Graham and it goes like this (emphasis mine):

“In the short-run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long- run, the market is a weighing machine.”

I’m certainly not making any predictions about the future of CYNK Technology’s shares. But, when a share can soar more than 200-fold in three weeks and has no assets and revenue, it really does pay to heed Graham’s wise words.

For me, CYNK Technology’s story seemed incredible and reminded me about the interesting recent collapse of a trio of penny shares in Singapore.

A story about irrational share market prices

Last October, Singapore’s share market was rocked when Blumont Group (SGX: A33), Asiasons Capital (SGX: 5ET), and LionGold Corp (SGX: A78) lost up to 96% of their market capitalisation in the space of less than a week.

In particular, prior to Blumont’s collapse, it had risen by almost 4,000% from August 2012 to the end of September 2013. Near its peak, the company was valued at 500 times trailing earnings and 60 times its book value – those are very high valuations no matter how the figures are sliced and diced.

Putting CYNK and Blumont together

Given CYNK Technology’s astounding 24,416% gain in just a few weeks, speculators who had earlier stepped on the gravy train, and then stepped off prior to the share’s current suspension (more on that shortly), would have made out like a bandit. And, those speculators would likely do it all over again if they could find the “next CYNK Technology.”

Along the same lines, very practical-minded speculators who had bought Blumont Group’s shares, rode it for an X00% climb (or more), and then sold it off before its epic collapse, likely wouldn’t mind repeating the process again with “the next Blumont Group”. Given the real Blumont Group’s 4,000% gain before collapsing, such thinking might even seem to make some logical sense.

But, there’s a big flaw in that train of thought. Just like Cinderella dancing in a ballroom without a clock, there’s nothing to tell us when the ascent of “the next Blumont Group” (or “the next CYNK Technology”) would come to a crashing halt.

For investors who are left holding the bag of CYNK Technology’s shares at its current prices or thereabouts, it’d be very interesting times ahead with the share currently suspended from trading by the Securities and Exchange Commission (the SEC is a financial markets regulator in the USA). As Tim Forstall, a contributor with Forbes, recently wrote about the company, “We will, eventually, find out what has actually been happening. The mills of the SEC may grind slowly but they do grind small.”

As for Blumont Group, investigations are currently ongoing in relation to possible infringements of the Securities and Futures Act in the trading of its shares.

Foolish Bottom Line

Looking at the experience (possible future experience) of Blumont Group (CYNK Technology), it’s perhaps best for investors to remember the following wise words from investing legend Peter Lynch when it comes to investing:

“I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.