Crash and burn!

July 26, 2005

It’s hard to find a stock that has had more of a rags to riches story than Host American (CAFE). For years, the company toiled in obscurity. But then, two weeks ago, Host announced that it planned to start surveying (whatever that means) several Wal-Mart Stores (WMT) in the Southwest to provide an energy-saving light system. The announcement, made at 6 a.m., sent the stock into orbit even though it was very carefully worded not to say that Host actually had a contract in hand. Still, by the end of the day, the stock had doubled. A week later it had increased nearly five-fold.

But as some of Host’s recent filings show, things aren’t looking quite so bright now. Last week, the SEC suspended trading in the stock and yesterday, regulators announced that the SEC had begun a formal investigation on Friday, an unusually speedy timeline for the SEC, given that they had only requested documents a week earlier. It almost goes without saying that several insiders managed to get rid of large chunks of stock during the big run-up but before trading was halted.

Meanwhile, ordinary investors have been burning up the message boards posting thousands of messages speculating about Host’s future. In two weeks on Yahoo’s Finance’s CAFE board, there have been more than 19,000 messages about the company. Before the Wal-Mart release, there had only been 1,500.

It will be interesting to see how this plays out in the end. It’s hard to drum up too much sympathy for day-traders who were speculating in the stock. Still, a lot of investors are likely to get burned as a result of the company’s carefully worded PR-spin.

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