How Not to Expand Advertising Revenues

A reader brings to my attention an intriguing article that ran on Kiplinger.com a few weeks back. The subject was a heavily promoted penny stock called Guangzhou Global Telecom.

Kiplinger writer Tom Anderson notes that "Shares of the small Chinese retailer started trading here on May 15 with an opening share price of $1.75. In little more than two weeks, Guangzhou soared 51% to close at $2.65 on May 31." The shares are now back down to less than a buck and a quarter.

Nothing unusual -- so far. But then Anderson points out:

Full-page advertisements that appeared in BusinessWeek, Forbes and Fortune make Guangzhou Global Telecom (symbol GZGT, quoted on the OTC Bulletin Board) sound like a major player in the world's most populous country. They say that Guangzhou has partnered with China Mobile, China Unicom and China Telecom, and that its "major carrier partnerships account for nearly $50 billion in revenues." Readers are encouraged to buy Guangzhou's stock because it will "fuel your portfolio for explosive growth."

Kiplinger rejected the ad, he said, "because the claims made in the ad could not be substantiated and because our inquiries raised more questions than they answered. In fact, the more we looked at this new stock, the more our eyes burned."

Anderson's article went on to raise doubt about the valuation of the company. (Not surprisingly -- this has been the trend recently -- he promptly come under attack from anti-naked-shorting nuts on Internet message boards.)

What's important here, I think, is not that a crummy little company was overhyped, but where it was overhyped. National business magazines need to exercise care, even in a poor advertising environment, to ensure that they are not used for stock promotions.

© 2007 Gary Weiss. All rights reserved.

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