18 red flags: why we shorted a stock that had risen 872% & the $600m wipeout.
Multiple company name changes was one of the key red flags.
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It was 9:59 am on Wednesday, 9 September. The market was one minute from opening, and my leg was bouncing nervously under my desk.
Two days earlier, six minutes before the opening bell, our largest short position, where we profit when a share price falls, had requested a trading halt.
The company was EchoIQ (ASX: EIQ). Its shares had rocketed 872% in the nine months before we opened our position in early July. Now trading was halted pending an eagerly awaited update on FDA approval for its AI software designed to help identify heart failure.
If the news was good, the stock could rocket higher again, taking some of our fund's capital with it.
But we had good reason to be sceptical.
Four name changes, eighteen red flags
EchoIQ triggered 18 of our proprietary Red Flags, the highest count among more than 500 Australian companies in our investment universe. And with a market value of around $1 billion on $100k of revenue, EchoIQ made SpaceX look like a deep value stock.
One of those red flags was particularly interesting: the company had changed its name four times.
Repeated name changes should make investors curious. Sometimes a company is trying to distance itself from a chequered history. Sometimes it is reinventing itself to embrace the latest hot theme.
Facebook, for example, renamed itself Meta Platforms at the height of the metaverse frenzy, then shed around 70% of its market value over the following twelve months.
On April 15 this year, Allbirds, a struggling purveyor of woollen sneakers announced it was pivoting into AI compute infrastructure. The market reaction was extraordinary, with the share price rising 582% that day.
Our research suggests investors are right to be wary. The chart below shows that companies changing their names four or more times over the preceding decade have, on average, been horrible investments, underperforming the market by around 20% a year.
Incidentally, I have three young daughters and, in my spare time, have been working on a Red Flags model for potential boyfriends.
Historic name changes are definitely near the top of the list. If anyone is interested, I may turn it into a software-as-a-service business.
EchoIQ's corporate history
It first listed on the ASX as Sentosa Mining, a minerals explorer focused on gold and copper. It subsequently became Parmelia Resources, then Veriluma, then Houston We Have Ltd (we had to check this name it seems so bizarre, presumably a reference to the ill-fated Apolo 13 mission?), before finally emerging as EchoIQ.
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In 2021, Houston We Have Ltd acquired Alerte Echo IQ for only around $2.5 million upfront, including just $1 million in cash, and pivoted towards using artificial intelligence to identify structural heart disease.
The transformation from mining explorer to AI healthcare company has an interesting historical echo.
The “gold to silicon” trap
During the late-1990s technology bubble, languishing Australian mining companies discovered that becoming internet companies could work wonders for their share prices.
Golden Hills Mining became Davnet. Welcome Stranger Mining became CommSecure. Walhalla Mining became Walhalla.com and then Kidz.net.
Academics later dubbed the phenomenon "gold to silicon." Investors who chased many of those transformations discovered that changing the story was considerably easier than changing the economics.
So, back to 9:59am.
The previous afternoon, EchoIQ had announced that the FDA had issued a Not Substantially Equivalent determination for the company's heart-failure technology. In simple terms, the eagerly anticipated regulatory approval had not arrived.
10:00 am. The market opened.
EchoIQ plunged from its pre-halt price of $1.28 to around 53 cents, wiping roughly $600 million from its market value almost instantly.
For investors who had bought into the story, it was brutal.
For us, it was a reminder of why we built our Red Flags model in the first place. No single warning sign tells you a company will fail. But when enough of them begin flashing at once, history suggests it pays to take notice.
In EchoIQ's case, 18 were flashing, not least the four name changes.
What’s the biggest red flag you’ve spotted in a company’s history? Let me know in the comments.
Get more information on the Plato Global Alpha Fund - Complex ETF (ASX: PGA1)
EchoIQ was a short position in the Plato Global Alpha Fund. The long/short global equities strategy is accessible on the ASX via the Plato Global Alpha Complex ETF (ASX: PGA1).
The Plato Global Alpha Fund has delivered +23.36% p.a. since inception on 1 September 2021 (to 31 August 2026). Click here to learn more.
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David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the firm’s history. He managed the JP Morgan Europe Equity Plus active-extension fund which was closed to new investors after growing to €6 billion, generating 4% p.a. net alpha over ten years. He also launched and managed the JP Morgan Europe Equity Absolute Alpha Market Neutral fund. In its first twelve months of operation, the fund returned over 20%, and grew assets to €1 bn. In 2014 he was the European Hedge Fund Manager of the Year (UCITS).
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David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the...
Expertise
David has more than two decades’ experience investing in global equities. Prior to joining Plato Investment Management he worked for JP Morgan Asset Management in London for fifteen years becoming one of the youngest managing directors in the...
Expertise
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