Back in June and July, RC365 (LSE: RCGH) shares experienced a huge spike on the back of some stock coverage. However, recently they’ve come crashing back down, falling around 70% over the last month.
Given the big share price movements in both directions, investors may be wondering if the AIM-listed FinTech stock has been part of a ‘pump-and-dump’ scheme. With that in mind, here’s my take on the situation.
What is a pump and dump?
A pump and dump is an unscrupulous investment scheme in which a group of investors aim to artificially inflate the price of a stock through false, misleading, or greatly exaggerated statements, in order to sell it at a higher price.
Once the operators of the scheme have pumped up the price of the security, they dump it, which usually sends its price down.
Typically, pump-and-dump schemes focus on micro-cap stocks with tiny market capitalisations.
With these types of stocks – which are often thinly traded and highly illiquid – it generally doesn’t take much to push a company’s share price up significantly.
1,000% gains?
Now, zooming in on RC365, it’s certainly possible that something like this has been going on here.
The reason I say this is that several months ago, there were some very bullish articles on the stock published on the Internet.
One such article was entitled ‘Missed Nvidia? This London AI stock could jump over 1,000%’.
This blog was posted on a number of different financial websites by different authors (and even advertised on a lot of websites).
And it made some huge statements such as: “Investing in stocks like RCGH today could be like buying into Apple, Google or Microsoft decades ago.”
Additionally, RC365 shares have been hyped up on popular bulletin boards such as London South East.
For example, I’ve seen traders boasting about the gains they’ve made, and stating very high price targets for the stock.
Overall, the recent stock promotion activity here has looked a bit suspect, to my mind.
A real company
I’ll point out that RC365 appears to be a legitimate company.
It has a decent management team that has many years of experience in the financial services industry. For example, CEO Chi Kit Law was previously Head of Banking Systems at MoneySwap Plc and Assistant Vice-President of Group Technology and Operations at DBS Bank.
It also has revenues. For the year ended 31 March 2023, the company posted revenue of HKD $16.9m (around £1.7m).
So, the company itself could go on to be successful.
However, the coverage of the stock that I mentioned above has pushed it up to very elevated levels in recent months.
For example, when I last wrote about RC365, early in August, the company’s price-to-sales ratio was about 100 (I generally regard a ratio of 10 as high/risky).
Valuation always matters in the end.
Recovering losses
Given the recent share price crash, there will be investors who have lost money here. That’s unfortunate.
My advice to anyone in this situation is to listen to Warren Buffett, who has said in the past: “You don’t have to make it back the way you lost it.”
What Buffett is essentially saying here is that when trying to recover from stock losses, an investor may be better off looking at other investment opportunities instead of trying to turn their losing stock into a winner.
