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What can investors learn from New Concept Energy’s share price?

Reddit forum WallStreetBets has garnered unprecedented attention recently as an ever-growing list of stocks are sent mile-high with a single mention on the forum. New Concept Energy [GBR] is one such stock — a tiny oil and gas company with five employees that saw its share price jump 959% on 28 January after a WallStreetBets nod.

Already, though, that bubble looks to have burst. What lessons can traders learn from New Concept Energy’s share price, as online forums make their presence known in the marketplace?

956%

New Concept Energy's share price jump on 28 January

  

 

What is New Concept Energy?

New Concept Energy produces a tiny amount of gas and oil from wells in Appalachia. The company is based out of Texas and dates back to 1978, although it was previously known as CabelTel International. It is a successor-by-merger of Wespac Investor Trust, and the company was incorporated in 1991 as Medical Resource Companies of America.

According to its financial report, the company produces circa 70 barrels a day. To put that in perspective, mid-level major Tullow Oil [TLW.L] expects to produce between 60,000 and 70,000 barrels this year — equivalent to just over 164 a day. In the full year 2019, it earned $0.46 a share on revenues of $590,000.

New Concept Energy's website says that it is looking for new on- or offshore projects in the $10m to $30m range that carry no to minimal exploration risks.

Chairman, principal executive officer, president, and CFO Gene S. Bertcher earned $56,500 in 2019, a far cry from the megabucks taken home by the heads of oil majors.

70

Number of barrels New Concept Energy produces a day - compared with Tullow Oil's 164

  

 

Why should investors care?

So, is this another hugely shorted stock as GameStop [GME] was? It doesn’t appear so. As of 14 January, New Concept Energy had 15,180 shares shorted, or 0.3% of its float, a drop from the 71,920 shorted as of 14 December.

What's happening with New Concept Energy’s share price illustrates the dangers of traders jumping on a bandwagon. The day after its meteoric gain, the stock dropped just over 55%. So, if you had bought at the 28 January intraday high of $30.99 per share, your holdings would have been worth just $6.54 a share by the close of trading on 2 February.

As traders pile into obscure stocks mentioned on online forums, then, there's a very real danger they will get burnt once the artificial bubble bursts. If you are knowledgeable about oil operations in specific parts of the US, then a company like New Concept Energy might be a stock to consider. Otherwise, it is difficult to do due diligence owing to a lack of coverage.

More dangerously, once price momentum dies down, traders who haven’t done their homework could lose out.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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