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What’s in a name?
Something as simple as changing a name to reflect a current trend can lure investors. Should you follow them, asks John Stepek.
On 5 October, Bioptix, a US-listed maker of diagnostic machinery for biotech businesses, announced that it would henceforth be investing in cryptocurrency-related businesses. It also changed its name to Riot Blockchain, complete with the catchy stock ticker RIOT''. Until that point, the share price had barely managed to get above $4 all year.
After the name change it shot up to around $8 and, since late November, it has surged to more than $40 a share, after it bought a stake in a cryptocurrency accounting-services firm. It's not the only beneficiary of a strategy "pivot" towards crypto. In October, London-listed internet investment firm On-line saw its share price more than quadruple when it announced plans to change its name to On-line Blockchain.
Can something as simple as a mere name change really drive such rapid share-price gains? It has in the past. Take the tech bubble. A paper by Michael J Cooper, Orlin Dimitrov and P Raghavendra Rau of Purdue University in the US, looked at 95 stocks that added ".com" or similar internet-related jargon to their names during 1998 and 1999. They found that the stocks made an average gain of 74% during the ten days surrounding the news. The effect was lasting, rather than a brief spike. In short, as the researchers wrote at the time, "a mere association with the internet seems enough to provide a firm with a large and permanent value increase".
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Now, you could argue that this has nothing to do with market irrationality, but is, instead, a result of the market presciently pricing in a brave new future for these companies, after they have refocused on a hot sector. But other studies demonstrate that you'd be wrong. For example, Kee-Hong Bae of York University and Wei Wang of Queen's School of Business found that when China's stock market was booming in 2007, US-listed Chinese stocks that had China in their company name significantly outperformed US-listed Chinese stocks whose company name didn't contain a reference to China.
The only explanation for the performance gap was that investors had spotted a boom and, in their rush to gain exposure to it, they jumped on the most obviously related stocks they could find, rather than scrutinise the underlying businesses.
What's the lesson here? We're not suggesting you try to predict which stocks are going to turn themselves into born-again cryptocurrency specialists next. However, it does seem clear that a big warning sign of a mania is when investors grow so desperate for exposure to a sector that they'll indiscriminately pile into any stock displaying the relevant buzzwords. In other words, it's another sign that whatever you think of their revolutionary potential cryptocurrencies are today's big bubble.
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