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Rapid growth of Synacor stock raises caution flag

Synacor Inc.'s stock is red hot.

Just be careful you don't get burned.

The Buffalo-based Internet content provider has done well since it went public back on Feb. 9. While its initial public offering price of $5 was less than half of the $10 to $12 the company hoped for, Synacor's business has shown promising growth during the last two quarters and its stock was steadily climbing, hovering around $7 to $8 for most of April.

But last week, Synacor's shares took off, jumping by 42 percent as trading activity in the stock went through the roof. Synacor shares closed Friday at $11.39, up $3.39 for the week.

Normally, that would be good news, but it looks like there's some monkey business going on with the stock. The biggest jump in trading volume and most of the price jump came after its stock was recommended in a newsletter written by a pair of stock promoters, including the notorious Jonathan Lebed.

You may remember Lebed because, back in 2000 when he was a 15-year-old high school student, Lebed settled a case with the Securities and Exchange Commission over allegations that he bought stock in 11 companies, pumped up the price by posting messages recommending the stock on the Yahoo Finance message board under fictitious names, and then sold his shares at a profit. As part of the settlement, Lebed agreed to turn over $285,000 in illicit gains, including interest, but admitted no wrongdoing.

But Lebed still is touting stocks, and last week's spike in Synacor had the worrisome scent of a "pump and dump" scam.

Pump, as in promoters taking a position in a stock and then aggressively talking it up. Usually, it's a lightly traded one like Synacor whose shares can be easily manipulated.

Dump, as in selling those shares at a tidy profit when the frenzy is at its peak, which typically sends the stock tumbling.

"Any stock being pumped by someone like Lebed, I'd want to stay away from, which is a shame because Synacor is a reputable local company," says Richard K. Schroeder, an Amhersts certified financial planner.

"They're a legitimate company. They make money. They're increasing their earnings," Schroeder says. "But people are speculating in it."

In Synacor's case, the speculation broke out into the open on Wednesday, when a website called the National Inflation Association, which is registered to stock promoter Gerard Adams, began touting Synacor shares. "NIA considers Synacor to be insanely undervalued compared to all other 2012 cloud computing IPOs," it wrote.

The next day, Lebed chimed in through his own newsletter. "Synacor is my new #1 pick for the rest of this year!" Lebed wrote. "I estimate Synacor could trade somewhere in between $30.20 and $52.96 in the upcoming months!"

Those valuations, however, are based on the shares selling at between six and 11 times its expected revenues for this year -- an ambitious target, considering the average company in the Standard & Poor's 500 index sells for 1.3 times its sales. Even Google sells for less than five times its sales.

Lebed and NIA appear to be working in tandem. They pretty much said so themselves. Consider NIA's disclaimer:

"NIA currently owns 379,000 shares of [Synacor]. NIA initially purchased 350,000 shares at an average price of $8.53 per share. NIA has agreed to a 60 day holding period on its initial position of 350,000 shares but intends to sell these shares at some point in the future after the date of July 2nd, 2012. NIA on Wednesday accumulated an additional 29,000 shares of [Synacor]. NIA intends to sell these additional 29,000 shares in the future and can do so at any time. NIA reserves the right to increase its [Synacor] position at any time."

Then compare it with Lebed's disclaimer: "I have not been compensated for [Synacor], but a firm that is owned by a client of mine who refers investor relations business to me owns 379,000 shares of [Synacor]. This firm has agreed to hold their initial position of 350,000 shares until at least July 2nd, 2012 but could sell them at anytime afterwards. This firm purchased an additional 29,000 shares on Wednesday that it can sell at any time."

I think we've got a match!

Lebed & Co. already have had a powerful influence on Synacor's stock. In fact, the change in Synacor's trading pattern has been astounding. During its first 2 1/2 months as a publicly traded company, Synacor was a pretty sleepy stock, with only about 235,000 shares changing hands on a typical day.

But once the stock touting started last week, the trading in Synacor shares became almost frenzied, with volume topping 3.6 million on both Wednesday and Thursday before the pace slowed to 1.7 million shares on Friday. In just the last three trading days, more than 9 million Synacor shares changed hands, more than were traded during the entire 2 1/2 -month period between Feb. 13 and April 27.

You can see it on the Yahoo Finance message boards, too. From the time Synacor went public through the beginning of May, there were less than 60 topics posted on the stock's message board.

Between Tuesday and Friday, more than 100 new topics were posted on the message board, as an Internet duel between traders looking for a big jump from the pumping and short sellers warning of the inevitable drop when the promoters sell their shares.

"The stock could rise to $40-50 in just a matter of weeks because of the enormous pumping," one poster, called josiecredeez, wrote.

"Can't believe people are falling for this scam. A literal [pump and dump] and people convince themselves its an investment. LOL," wrote another, under the name cwtripps.

Meredith Roth, a Synacor spokeswoman, said the company doesn't comment about its stock, but she also pointed out that the shares now are in that $10 to $12 range that the firm hoped to hit with its IPO before weak demand for the stock offering forced it to reduce the price.

Allen F. Grum, the president of Rand Capital Corp., the Buffalo venture capital firm that owns a 3 percent stake in Synacor, noted that the trading frenzy also had spilled over into Rand's shares, where volume also spiked on Thursday without moving the stock price significantly.

"As an optimist, I'd like to think the market is finally realizing [Synacor's] inherent value," Grum said.

But W. Lawrence Buck, a principal at Winthrop Financial, a Buffalo investment firm, says it doesn't take as much to move a lightly traded stock, even if it's a legitimate company like Synacor.

After all, the last stock NIA and Lebed touted, a tiny dot-com company called BroadVision, shot up from $8.75 in September to a peak of $56.46 in March, only to fall back below $20 on Friday.

There's a lesson there.

"I'd be cautious," Buck says.