Herb Greenberg


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Herb Greenberg is senior columnist for TheStreet.com. Before joining TheStreet.com he was a columnist for 10 years at the San Francisco Chronicle , and a reporter for the Chicago Tribune . He also spent a year as an analyst at an arbitrage partnership.

Avoiding problem stocks: lessons from Lernout & Hauspie

Lernout & Hauspie, a Bulgarian developer of voice recognition software, found a fast audience with Wall Street with its sexy story: software that will eliminate the need to type . But the sizzle was more than the substance, causing the company to catch the eye of shortsellers who began probing its underbelly. Not only was it run by Gaston Bastiaens, known in Silicon Valley for the fast rise and fall of Quarterdeck, but it was engaged in various related party dealings that questioned the quality of its financial results. The company denied there were problems, but in the end Lernout filed for bankruptcy and within months the company's co-founders and former CEO were arrested on securities fraud charges. The stock, which once traded as high as $72 USD in its high flying days, now trades for just pennies.

  1. Don't be fooled by a supposedly hot new technology that is a better story than a business.

    Lernout & Hauspie is the poster child for this. Speech-recognition technology is likely to be big one day, but in all likelihood it will be a low margin product that is given away.

  2. If one analyst drops coverage of a company, veering from a crowded pack, find out why.

    This could be the first sign of trouble.

  3. Don't ignore stories about shortsellers who are raising critical issues about a company.

    This is often the first sign of trouble.

  4. Take note if a company picks a public fight with shortsellers and/or refuses to return calls to reporters.

    This IS the sign of trouble!

  5. Beware of companies that say they are immune from issues hurting their competitors .

    In very few cases is this so.

  6. Beware of companies that rely heavily on related-party or too-close-for- comfort transactions, no matter how well they're disclosed.

    In Lernout's case there was a wide web that, in the end, helped inflate revenue and reduce expenses.

  7. Don't be fooled by companies that boast investments by well-known companies like Intel and Microsoft.

    Both held big stakes in Lernout & Hauspie.

  8. Don't get fooled by a rapidly rising stock price.

    It doesn't necessarily reflect underlying fundamentals and sometimes means nothing more than . . . the stock is rising! Lernout's went from $20 to $72 in a flash, making its investors feel like geniuses.

  9. Be leery of any company in which the analysts raise their target price while cutting earnings estimates.

    It simply doesn't make sense unless they're trying to hype it to issue stock.

  10. The minute you think you're a genius - that you have it all figured out - start looking over your shoulder.

    You are about to get blindsided .

www.TheStreet.com



Global-Investor Book of Investing Rules(c) Invaluable Advice from 150 Master Investors
The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors
ISBN: 0130094013
EAN: 2147483647
Year: 2005
Pages: 164

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