Gullible Investing: How a Sandwich Shop Grew its Valuation to $100 Million in Two Years

Filed under “you just can’t make this stuff up,” a New Jersey deli, with total sales of $35,000 and zero profits over the last two years, went public in 2019 and now has a market capitalization of around $100 million. As one market observer cracked, “The pastrami must be amazing.”

But it’s not. Its menu offerings are unremarkable at best, as is its single location that sells about $80 worth of sandwiches each day. Yet investors (if you can call them that) have driven the stock price up from one dollar a share to a recent closing price of $13.50 on 8 million outstanding shares, despite the fact the deli was closed for most of 2020 due to the pandemic!

Wait, it gets even better. The founder and CEO of the establishment, Hometown Deli, is a high school teacher and wrestling coach with zero restaurant industry experience. His 20 percent stake is now worth more than $20 million. The company’s vice-president is a math teacher at the same school.

Did I mention this deli sells about $80 of food each day?

It Doesn’t Even Pass the Taste Test

The New Yorker magazine arranged for a private valuation of the deli, sending an assortment of sandwiches to a well-known Italian specialty store 90 minutes away. The store manager, an expert in sandwiches, knew little of Hometown Deli except that it had a single location. After taste-testing several sandwiches, which he rated as “pretty good,” he gave the deli a valuation of fifty thousand dollars. That same day, the share price of Hometown gained another 9 percent.

So, what’s going on here, and why do I even bother giving it a mention here?

It’s Not Even a Real Stock

The first thing to know is that Hometown Deli (operating under the umbrella of Hometown International) is not traded on any of the major exchanges. It’s traded over the counter through the “pink sheets.” Pink sheet stocks are mostly penny stocks that trade under the radar with low volume. The average volume of Hometown shares is under 3,000, which is virtually non-existent.

Possible Explanations for Hometown’s Stock Surge

Given its lack of any significant business, there’s no explanation for why anyone would pay much at all for the stock over the past year, much less bid it up to its current valuation. It could be a part of a “pump-and-dump” scheme. That’s where shady, boiler-room brokers buy a massive number of shares of a low-priced penny stock and then pump the stock price up by convincing unwitting investors to buy the stock in big chunks. Once the stock price is pumped up, the brokers dump their shares, leaving investors holding an empty bag.

The price surge could also be the result of technical traders who’ve latched on to Hometown stock because it popped up on one of their technical strategies. Many technical traders trade in penny stocks because they tend to be volatile, and they can capitalize on price movements. They don’t care about the fundamentals of a company, just that the stock price moves. They’re sometimes in and out of a stock in days or hours. Momentum or swing traders may stay with a stock for weeks or months. When word gets out of successful trade, the stock can pick up more momentum, often catching the eye of people who want to get in on the action, regardless of the company’s fundamentals. So, this could be the unintentional result of uninformed investors buying into a technical strategy.

While these might be the most plausible explanations for the surge in Hometown stock, all anyone knows for sure is that real people are willing to pay for it. These are probably the same people who bought GameStop stock after speculators drove its price to artificially high prices. They’re probably the same people driving the surge in low-priced cryptocurrencies like Doge and XRP for no particular reason other than their prices are surging. Many of these people think they’re investing, but all they’re doing is speculating, which is nothing more than gambling. That’s no way to build wealth.

Knowing What You Now Know, Would You Buy This Stock?

Would any thoughtful investor put their money into a company with zero profits on just $35,000 of sales over two years? Would they ever invest in the stock of a restaurant operating out of a single location in a low-slung grey box of a building? Would they buy it knowing it sells just $80 of unremarkable sandwiches each day? Would they invest in any business in which management has zero experience in the industry?

Along with looking at the strength of the company’s balance sheet and income statements, these are the fundamental questions any thoughtful investor would ask before risking their money. Even if you’re in it for a quick buck, wouldn’t it make sense to know that you’re not betting money on a hoax?

The key to building wealth is not losing money. That’s why I advocate knowing what you own because you don’t want to end up buying a deli in New Jersey. I don’t think.

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