In the world of business, “poop and scoop” is the practice of spreading rumors or false information about a security so that it causes the security’s price to fall (poop). Then, with the newly deflated price in place, the security is bought (scoop) with the expectation that its price will rise back up once investors realize the negative information spread about the security was not valid.
Pooping and scooping is ultimately a type of market manipulation, where the information is spread maliciously with the goal of making a security’s price fall in order to buy the securities at a much lower price. It is for such reason that the practice is deemed illegal.
The poop and scoop strategy uses false information to drive down the price of shares artificially.
The low-priced stocks can then be scooped up and resold for profit when share prices rise again.
The practice is highly illegal.
Example of the Poop and Scoop Strategy
In 2000, a young man put out a series of negative press releases on Emulex Corporation, a company that manufactures and sells hardware for internet connectivity. The man, only 23 years old, sold short 3,000 shares of stock in the company, trying to make a profit off of the sudden per share price decline after he spread false, negative information.
The young man used an ex-employee of a press release distributor to create and release false statements that Emulex’s CEO was leaving the company and that it would be changing its quarterly earnings estimate from a profit to a loss. The individual’s action, of course, caused share prices to free fall when shareholders, investors – and the market in general – panicked at the “news.”
He was able to make about $250,000, covering all his short positions and using much of his profit to then buy up shares of Emulex at the artificially lowered price. Trading in the stock was eventually halted on NASDAQ when the press releases were found to be false.
Poop and Scoop and the Internet
The widespread use of the internet today makes the poop and scoop strategy even more potentially damaging. For traders with even the smallest amount of voice, a negative word or idea about a company can be widely circulated in a brief period of time. In the example above, the internet was relatively new and was not a viable option for the young man to use. Today, however, the case and its implications could’ve been much worse.
For a trader or even a disgruntled ex-employee of a company, spreading false rumors about a company can lead to catastrophic price drops for its shares.
Pump and Dump
Pump and dump is the exact opposite of the poop and scoop strategy. Pumping and dumping is the practice of knowingly buying up, praising, and marketing a security, with the intention of selling shares at an inflated price when investors rush to buy the pumped-up stock. Like pooping and scooping, the practice is highly illegal.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: