Converted Organics: Story's Over, Time to Get Out

May.20.08 | About: Finjan Holdings, (FNJN)

I wrote an article about the foolish speculating in Converted Organics (Pending:COIN) a couple of months ago, and just as I predicted, the greed that was driving up the stock price turned to fear and the stock price took a huge dive. However, the stock price rebounded from its lows and held up for a little while but is now starting to sell off again.

The reason for the most recent sell-off is the company issued a dismal earnings report last Friday. Converted Organics reported revenue of $260,000 and a loss of $2.4 million. That is pretty egregious. Some of the greater fools that are still buying Converted Organic are going to say that this earnings report is better than the last earnings report because the company actually reported some revenue. However, this company was actually a better speculative investment when it had no revenue.

If you do not understand this, let me give you a lesson in speculating. When you buy a company such as Converted Organics you are buying the story not the actual stock. The reason Converted Organics made such a big run was because it had a small float and was in a hot sector. It also helped that the company was a “developmental stage” company and had no revenue. This meant that people could justify their purchase of Converted Organics because of the potential of the company.

Now however, the hype has faded away and the brutal financials have to be taken into account. The reality is that Converted Organics is nowhere near making a profit. On top of that, the chart is starting to get pretty ugly. I wouldn’t be surprised to see the stock price of Converted Organics fall all the way back to the $2.50 range in the next several months.

The lesson here is to trade the story and the momentum when it comes to super speculative stocks like Converted Organics. When those to things start to fade away it is time to get out.

Disclaimer: I have no position in COIN.