The Aleph Blog » Blog Archive » A Pox on Promoted Stocks

A Pox on Promoted Stocks

Ugh. Penny Stocks.  Ads for any stocks, much less penny stocks.  Now the ad to your left showed up on my blog’s ads, and I said, “I have to respond to this.”  Sadly, if I write about the evils of penny stocks, I get more penny stock ads.

But if you clicked on the banner to the left as an ad, you would be taken here.

The banner ad there tells you how important and profitable the industry is that Nova Mining claims to be in.  They are the only American firm traded on an American Exchange in the diamond industry.  They mention how diamonds are used in “rail guns” and oil drilling.

But how much revenue have they obtained from selling diamonds?  Zero.  There is little to no revenue for the firm.  Earnings are negative, net worth is negative.  The company lives off of borrowing money, and issuing equity.

They own mining rights on a few properties — that’s the only asset.  It is a long shot gamble that some properties in Canada and Guyana may produce diamonds.

Rule of thumb: long shots are usually losers, because investors overpay for the possibility of the big score.  There is a subset of investors that are risk loving, to the same degree that people buy lottery tickets.

Now, as for the ad, I can’t understand it, unless the connection is diamond tipped drills will produce more energy, thus hurting Iran and Venezuela.  That’s a pretty tenuous connection, in my opinion.

As with most of my posts on penny stocks, let me list what are the risks from the documents filed with the SEC:

  • WE HAVE LIMITED BUSINESS OPERATIONS AND A SINGLE MINING CLAIM. WE HAVE NOT IDENTIFIED ANY ALTERNATIVE BUSINESS OPPORTUNITIES. OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS WILL CONSIST OF EXECUTING OUR BUSINESS PLAN AND RESEARCHING NEW OPPORTUNITIES.
  • WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING. (and cash is much worse now)
  • WE HAVE LIMITED OFFICERS AND DIRECTORS (only 2 people working, or so)
  • WE DEPEND ON MANAGEMENT AND MANAGEMENT’S PARTICIPATION IS LIMITED
  • WE MAY CONDUCT FURTHER OFFERINGS IN THE FUTURE IN WHICH CASE INVESTORS’ SHAREHOLDINGS WILL BE DILUTED. (And that has happened multiple times.)
  • BECAUSE OUR STOCK IS A PENNY STOCK, STOCKHOLDERS WILL BE MORE LIMITED IN THEIR ABILITY TO SELL THEIR STOCK.

The more I review penny stocks, the more hopeless they seem.  Good businesses start with strong capital, and go from strength to strength.  Lousy businesses start undercapitalized, and go from crisis to crisis, which almost never improves value.

Don’t buy penny stocks, or any stock that is promoted.  Never buy stocks where financing is an issue.  Only buy sound companies, large, small, or in-between, that do not need frequent refinancing.  Companies that must refinance are rarely good investments.






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5 Responses to A Pox on Promoted Stocks

  1. [...] Buy promoted stocks with money you really want to lose.  (Aleph Blog) [...]

  2. MichaelGoode says:

    The worst thing isn’t that most OTCBB companies are horrible, worthless companies. The worst thing is that many of them are put together for the sole purpose of being stock promotions. A good example of that is current promotion SNPK. David Baines of the Vancouver Sun has written about lots of similar companies, like past promotion HHWW http://blogs.vancouversun.com/2011/04/27/david-baines-horiyoshi-worldwide-another-bulletin-board-promotion-goes-south/

  3. [...] David Merkel: The more I review penny stocks, the more hopeless they seem.  (Aleph Blog) [...]

  4. [...] originally Legend Mining, which was based in China, and was looking for diamonds in Canada, much as Nova Mining may be doing.  Any organization flexible enough to switch industries from mining to agriculture is [...]

  5. [...] Legend Mining, which was based in China, and was looking for diamonds in Canada, much as Nova Mining (Nova Mining [...]

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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