Content provided by Grant Engelbart, CFA, CAIA, Director of Research & Senior Portfolio Manager
If you haven’t heard, Zoom Video Communications went public on April 18, 2019, under the ticker ZM. Full disclosure, we use Zoom video conferencing around the office, and it’s quite nice, especially in today’s workplace with travel and remote employees. The company’s first day of trading went fantastically well. The stock soared 72% on the day. However, there is another company, Zoom Technologies Inc (ticker: ZOOM), that sells communication and wireless equipment and on December 28, 2018, the market cap of ZOOM was . . . $30. Not $30 million, not even $30,000. $30! Things all changed, however, when Zoom Video Communications (ZM) filed its S-1 to go public on March 22, 2019. Suddenly, ZOOM started, well, you know, zooming. By the time the “real” Zoom (ZM) went public on April 18, ZOOM had gone from pennies on the dollar to a high of nearly $6/share, taking that $30 market-cap to more than $17 million at one point! The stock’s peak-to-trough move from the December lows to the highs reached April 15 (three days before the ZM IPO!) was a whopping 57.6 million percent. Many publications discussing the move have used the last 30 days — a return of “only” 56,000%.
How could something like this possibly happen in today’s age of informational efficiency? Surprisingly, this isn’t even the first time this has happened! A tiny company being bought by accident in droves? Not only was it being mistaken for ZM, but trading was accelerating before the ZM even went public. Some websites were even linking the corporate page of ZOOM to Zoom Video Communications accidentally. Maybe people are thinking ZM will buy ZOOM just for the ticker?
These are most likely individual investors — or highly mistaken computers — and there are no doubt lessons to be learned:
- People Need Help
- April is financial literacy month, and what better way to illustrate it. Financial advisors are absolutely essential for financial success, not only as coaches through the tough market times but also as knowledgeable guides about traps like ZOOM!
- Active Management Can Still Add Value
- Particularly in areas of the market, such as smaller companies here and abroad, where there is less efficiency, a skilled active manager or active-like strategy (such as factor and smart beta products) can take advantage of inefficiencies. I’m not saying a highly inexpensive stock like ZOOM would find its way into any of these products, but more reasonable and tame inefficiencies exist.
- Details Matter
- This is definitely an instance where it should have been clear that these are not the same companies. However, there are plenty of instances where doing the proper due diligence and research can reap rewards over time. Probably not 58 million percent, but consistent advantages that add up over time. There are a number of nuances within index-based ETFs and active funds that need to be accounted for.
I’m sure this has gone viral and then some on financial Twitter by the time of publication, but there will no doubt be more of these types of things happening in the future. If computers can eliminate some forms of human error, human error will simply change forms, like a virus. And there’s no vaccine! But there is plenty that clients and their respective advisors can do to help mitigate the spread of these issues.