Are Redditors Being Fooled By Corporate Showmanship?
“If you can’t dazzle them with brilliance, baffle them with bullsh*t.”
— W.C. Fields
I’ve long suspected that overly dazzling CEOs make for poor Moonshot stewards. CEO Henry Ji of Sorrento Therapeutics (NASDAQ:SRNE) made his firm sound so mind-bogglingly complex that it took me hours of due diligence to break through the fog. Shares are down -30% since I warned investors to stay away.
Meanwhile, straight-talking CEOs like Moderna’s (NASDAQ:MRNA) Stéphane Bancel have seen shares of their company rise 540% during the same period. When you have a great product, there’s no need to hide behind bluster.
Now the quants at Nomura Research have proved that theory in a fascinating new study.
Analyzing thousands of earnings call transcripts, researchers found that complex language tended to predict worse returns. Since 2014, the CEOs in the highest complexity decile have underperformed their straight-talking peers by 52%.
Baffling Investors with Bullsh*t
The rationale is simple: failing companies often try hiding their sins behind bluster.
Consider this gem from Steve Burns, the now-disgraced ex-CEO of Lordstown Motors (NASDAQ:RIDE). Here’s how he described the sales process of the one-time Reddit darling.
“We are continuing to work on establishing relationships with fleet management companies that we believe can be the basis for meaningful revenue once the truck is ready for sale, and we can demonstrate that it performs to our expectations.”
In other words: he’s talking with potential customers.
From a scientific standpoint, researchers at Nomura used the aptly named Gunning-Fog index to quantify such blather. The scale typically ranks texts in the range from 6 to 17, with numbers corresponding to grade-level of complexity (i.e., a score of 10 = 10th grade difficulty).
Donald Trump and Barack Obama’s inaugural addresses, for instance, scored 11s, while Professor H.A. Ölander’s speech at the 1967 Chemistry Nobel Prize awards came in at 14. Most of Reddit’s r/WallStreetBets comments score a 10 or less.
Sorrento and Moderna’s earnings calls typically come in at 16.5 (graduate level) and 11.5 (high school difficulty), respectively.
But Steve Burns’s snippet I quoted earlier? Comes in at 25.
Lifting the Fog on Reddit Moonshots
Applying the same principle to Reddit stocks can help us differentiate between robust Moonshots and floundering wannabes.
But there’s one problem: most penny stocks and cryptocurrencies featured on Reddit don’t have earnings transcripts. The little information available on annual reports and whitepapers is so massaged (and often written by teams of lawyers or coders) that it becomes meaningless. In fact, the team at Nomura ignored annual filings in their study of regular companies.
But the Gunning-Fog analysis can still help us analyze Reddit ideas. Penny stock CEOs and crypto developers often leave their mark in other ways, whether on websites, tweets or videos. And by applying the principles of the Gunning-Fog index to these mediums, we can get a sense of how much potential bullsh*t is coming our way.
The Good: Reddit’s Buy-and-Hold Gems
Fortunately for us, some Reddit penny stocks still host regular earnings calls. Some are traded on foreign exchanges, while others simply have low prices per share.
POSaBIT (OTCMKTS:POSAF). My top penny stock pick — POSaBIT — falls into the former group. Though the company trades OTC in the U.S., its main Canada listing means that CEO Ryan Hamlin is regularly featured every quarter.
There’s little that Mr. Hamlin needs to hide. POSaBIT is a leader in point-of-sale systems for cannabis stores — an industry that Visa (NYSE:V) and federally licensed banks are barred from entering. It’s a high-margin, high-growth business that Reddit investors could soon pick up on.
The easygoing CEO’s talks clock in at a “12” on the Gunning-Fog index, average for a typical firm, and low for a tech/crypto outfit dealing in the cannabis trade. In my book, that’s a definite “buy.”
Dogecoin (CCC:DOGE-USD). As expected, the website for one of Reddit’s favorite cryptocurrencies clocks in at an easy-to-read 10 on the Gunning-Fog scale. “Dogecoin is an open source peer-to-peer digital currency, favored by Shiba Inus worldwide,” describes the coin’s developers. It doesn’t get much simpler than that.
The cryptocurrency’s accessibility has also become its key selling point. Users don’t need to know what “Decentralized Finance” is, or how to set up wallets on the blockchain. Instead, memes and Robinhood accessibility are often enough to get people on board.
That’s by design. Though the cryptocurrency has a major “whale” investor, its open-source code based on Litecoin’s protocol means DOGE is community-owned with a predictable inflation rate. Translation: investors need not fear rug-pulls or honeypots.
So although Dogecoin has its own challenges ahead, it’s a currency whose simplicity has rightly drawn Reddit’s favor.
The Bad: Short-Term Flips
As we go up the language complexity scale, social media darlings start looking more questionable.
Gravitoken (CCC:GRV-USD). My top Spamcoin pick of September has continued to rocket ahead. Twitter (NYSE:TWTR) investors have started to notice too: followers recently surpassed 10,000.
But behind the stunning returns on the price chart and the timeline hides language so convoluted even I needed to take a second read.
“Gravitoken is mathematically designed to increase in price every hour, allowing you to be worry-free knowing your investment is protected through a constantly increasing liquidity pool solidifying the price floor.”
The word soup clocks in at 16.5, roughly equal to Sorrento’s mind-melting earnings calls. And that’s precisely why I’ve always emphasized that tokens like Gravitoken are short-term bets you should dump the moment momentum turns — typically a span of 3 to 10 days.
Shiba Inu (CCC:SHIB-USD). My other lower-quality social media pick Shiba Inu has equally confusing language. Its website language complexity comes in at 14.5, far higher than Dogecoin’s 10.0. And from a technological standpoint, it’s clear why.
At its core, Shiba Inu is an Ethereum ERC20 token with little practical use. It doesn’t run its own protocol, nor solve any problems that Ethereum (CCC:ETH-USD) hasn’t already done. In other words, SHIB owes its value to social media popularity and not much else.
That doesn’t necessarily make it a worthless asset. Since I recommended SHIB in August, prices have inched up 5% while Bitcoin (CCC:BTC-USD) has fallen 7%.
However, buy-and-hold investors need to tread carefully. Once Twitter and Reddit tire of this crypto Moonshot, there’s a long way for SHIB to fall.
The Ugly: Frauds, Heists, and Rugpulls
Finally, there are the outright frauds that cloak themselves in doublespeak and buzzwords to try and hide their sins.
SOS Limited (SOS). Sometimes, Reddit users dofall for stinkers. And that brings us to SOS Limited, a firm whose earnings calls clock in at an 18.5 on the Gunning-Fog scale (Ph.D. complexity).
“We saw our borrowers, overall, delinquent rate remained relatively stable, which demonstrates the validity of our predictive selection technology and the automated decisioning technology,” their CEO said on a quarterly call.
The crypto miner’s confounding language raises red flags. Why couldn’t they have just said “our AI programs work okay-ish?”
Other InvestorPlace writers have similarly chimed in. David Moadel and Mark Hake have raised concerns about accounting fraud, joining me in their skepticism of the company.
And now Reddit seems to be catching on. Comments on r/SOSLimited have fallen from around 50 per day to 10. Unless management can straighten things out, the stock will have further to fall.
LunaYield, Compound Finance and Other Rugpulls. Unsurprisingly, some of the biggest crypto scams similarly rely on confusing language to mislead. LunaYield, Solana’s (CCC:SOL-USD) biggest rug-pull to date, had a 16.0 score on their site before developers deleted everything. And Compounder Finance’s website came in at 15.5 — before its developers made off with $11 million of investor money.
Many of these questionable tokens hide their intentions in a flurry of popular catchphrases.
“The first possible decentralized marketing platform next generation cryptocurrency that automatically gives you an imbalance because it holds and helps reduce poverty in the world”
— WolfSafePoorPeople (CCC:WSPP-USD)
“The first synthetic decentralized finance sector Index Fund to invest in entire DeFi sector with one single Token on Binance Smart Chain”
— Defi1000 Rebase (CCC:D100-USD)
You get the idea.
Of course, rug pulls can happen on tokens with simply written websites too. Conversely, legitimate cryptos can sometimes turn off investors with overly complex language. But before you jump into the next hot token on Twitter or Reddit, it’s worthwhile checking to see how straightforward their marketing materials truly are.
When Reddit Sees Through Bullsh*t
Redditors seem to have little long-term patience for CEOs who don’t deliver. Consider GameStop (NYSE:GME), a company that once produced 18.0 earnings calls so thick anyone would have trouble reading them over.
“The third fiscal quarter represents a key pivot point in our trajectory to stabilize, optimize and transform GameStop. We have made significant strides in stabilizing and optimizing our core operations and are excited about the transformational plan”
— George Sherman, CEO, December 2020.
Retail investors were unimpressed. Instead, their bets were on activist investor Ryan Cohen, whose simple tweets wouldn’t even register on the Gunning-Fog scale (Researchers apparently failed to consider emojis).
That’s why investors need to watch language closely. Because when it comes to explaining their businesses, it’s straight-talking CEOs who respect the Reddit crowd, rather than those trying to baffle investors with bullsh*t, that will carry Moonshot Investors to the moon.
FREE REPORT: 17 Reddit Penny Stocks to Buy Now
Thomas Yeung is an expert when it comes to finding fast-paced growth opportunities on Reddit. He recommended Dogecoin before it skyrocketed over 8,000%, Ripple before it flew up more than 480% and Cardano before it soared 460%. Now, in a new report, he’s naming 17 of his favorite Reddit penny stocks. Claim your FREE COPY here!
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.