This High Flying Stock returned 80% in One Month

The stock market is definitely not a place where easy money is made. Despite the belief that the market is efficient, this theory is constantly proven incorrect when it comes to small and micro caps. A prime example today is to look at LML Payment Systems LMLP.

Look at this High Flying Stock

LML Payment Systems is a small company based in Vancouver, Canada, operating in a very profitable market of processing payments, managing risk and authenticating payments. The great thing about such a business is that the number of customers is abundant with very few focused customers. Such businesses also require a heavy amount of intellectual property which makes competitors difficult to compete.

There are many things to like in terms of moats.

• Customers will find it difficult to switch to another service provider, thus creating a network effect.
• Positioned in a profitable growing niche as the economy continues to evolve around the internet.
• Intellectual property in the form of patents which lasts for years.

Spectacular Earnings Making Investors Giddy

Earlier in February, LMLP LMLP reported blockbuster earnings for Q3. Overall revenue increased 133% with Transaction Payment Processing segment adding 406 new merchants and increasing revenue by 30%. Net income of $2,119,000 compared to a net loss of $396,000 last year and a huge increase of cash provided by operating activities to $4,420,000 compared to $75,000 last year.

Looking at the highlights the company provided in the press release, you would naturally conclude that you have just discovered a jackpot.

The CEO made positive remarks on the outlook of the company.

"We are pleased to announce these results for the third quarter and first nine month period of our fiscal year. All three of our business segments reported increased revenue and profitable results. Our Transaction Payment Processing segment continued to grow impressively at 30%. Our check business increased revenue by 22% and our Intellectual Property segment grew revenue by 350% during the last quarter. We are encouraged by these results and the impact of aligning our business segments; our products and services; and our customers' needs, as an increasing number of payments transition to electronic forms and are increasingly conducted over the Internet," 

Uh Oh.. What was Missing in the Press Release?

With such an increase in profits and positive outlook, the stock rocketed up 80%, but has since fallen 57% from the peak. Why such a drastic turn of events for a stellar company?

Simple. Lots of material information are left out of the press release. Seeing as how 95% of people do not crack open a filing, trading and momentum websites picked up on the increasing volume and started recommending.

The important piece of information missing from the press release is that LMLP has been in involved in litigation after litigation since November 19, 2008. Nineteen to be precise, with more coming.

In Q3 alone, LMLP earned 32.6% of revenue from winning lawsuits. These earnings are non-recurring, meaning you won't see this type of performance again. The worst thing is that it was from two of their own customers. LMLP seems to go about filing lawsuits against its own customers. Definitely not a good way of retaining customers.

Thank Goodness you missed this Flying Stock

Next time you read a press release that looks too good to be true, remember it usually is. Don't worry about whether you missed the next high flying stock. Just verify it with the filed reports so that you don't lose your hard earned money.

Jae Jun runs Old School Value, a value investing service providing stock valuation spreadsheets, stock analysis and value stock screeners for the DIY investor. He writes a weekly Tuesday column for Benzinga.