The Aleph Blog » Blog Archive » Pennies from Hell

Pennies from Hell

I had lunch with Eddy Elfenbein today, and we had a great time together.  After all of the time that we have e-mailed, linked, etc., it was great to make the acquaintance.

Before I start tonight’s post, that makes me want to say this: if you are a blogger that likes me, and you are traveling to the Baltimore/DC area, email me, and let’s get together.  Even if you are marginal on me, try me, and if I accept I will buy lunch.

Many of us as bloggers do a service for the investment community; I have sometimes said that we are the conscience of Wall Street.  Well, tonight’s post is another post to warn people away from a class of investments that almost always loses money: promoted stocks / penny stocks.

As I looked through my archives, I was surprised at how many promoted penny stock I have written about — there were eleven.  Not what I intended when I started this blog, but I go where I think I am needed.  So, what has the performance been of the promoted penny stocks since I wrote about them?

TickerDate of ArticlePrice @ ArticlePrice @ 5/30/12Decline
GTXO

5/27/2008

2.45

0.04

-98.4%

BONZ

10/22/2009

0.35

0.02

-94.3%

BONU

10/22/2009

0.89

0.10

-88.8%

UTOG

3/30/2011

1.55

0.05

-96.8%

OBJE

4/29/2011

2.90

0.05

-98.3%

LSTG

10/5/2011

1.12

0.15

-86.6%

AERN

10/5/2011

0.0770

0.0016

-97.9%

IRYS

3/15/2012

0.261

0.160

-38.7%

NVMN

3/22/2012

1.47

1.35

-8.2%

STVF

3/28/2012

3.24

0.53

-83.6%

CRCL

5/1/2012

2.22

1.34

-39.6%

Can I say “Ouch?!”  This is almost as bad as the dot-com bubble, except there are no successes to give the illusion that if you pick them right, you will do fine.

But today, after coming home from lunch, I went to the mailbox and found three (THREE!!) penny stock scams in my mail, two from the same promoter.  I could be wrong, but I think the frequency of penny stock scams is increasing, perhaps out of desperation for some people to make money.

One of the promotions was Circle Star, which I have mentioned before, though this was through a different promoter, and you can see the promotion here.  The writer received $75,000 for his efforts.  Enough said.

Then there was Oryon Technologies [ORYN], Inc.  This company that masquerades as a technology and apparel company, was a mining company three months ago.  It has never earned a dollar of revenue.  Enough said.

The last one was Barfresh Food Group, Inc. [BRFH]  Smoothies as a patentable investment idea is ridiculous.  But at least the disclaimer on this one is honest:

Do not invest in this company unless you can afford to possibly lose your entire investment. NBT Equities Research and/or its publisher, ChangeWave, Inc., dba NBT Communications has received thirty five thousand dollars and been pledged seventy-five thousand shares of rule 144 common shares in Barfresh Food Group Inc. to assist in the writing of this advertisement. Primo Strategies LLC paid one million three hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this report, including printing and postage, in an effort to build investor awareness.

and

Primo Strategies LLC was paid by non-affiliate shareholders who fully intend to sell without notice their shares into this advertising/market awareness campaign, including selling into increased volume and share price that may result from this campaign. The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this campaign. A non-affiliate shareholder acted as advisor to Primo Strategies LLC in this market awareness campaign, including providing outside research, materials and information to outside writers to compile written materials as part of this campaign.

and

Third Party/Agency Disclaimer: Content of this message is published by NBT Equities Research, LLC and/or its publisher, ChangeWave, Inc. and sent to select email lists through various marketing agencies to provide readers with information on selected publicly traded companies. Winning Media is managing a total budget of $250,000 for this and other advertisements in an effort to build industry and investor awareness. The $250,000 budget was provided to Winning Media by MarketByte LLC, a shareholder of Barfresh Food Group, Inc. MarketByte LLC reserves the right to buy and/or sell shares of Barfresh Food Group, Inc. at any time. This should be viewed as a potential conflict of interest.

This company has received revenues, but has not earned profits, and has a negative net worth as well.  It was a company searching to buy movie scripts, and realized that smoothies were a better business.  Go figure.  In general, companies that make big shifts in industrial direction are usually horrible companies.

Think about this Differently

Suppose for a moment you did have a great idea that could revolutionize a given business.  Would you:

  1. Try to grow the business using only your own capital, and that of friends and family, and a limited number of  angel investors, until you realize that institutional capital and knowledge is needed to take this to the next level, i.e., venture capitalists.  Advertise where needed, but don’t give potential competitors too much of an idea that you are out there.
  2. Take over a rotted shell of a public company, and use its broken balance sheet to attempt to grow.  Exchange unpayable loans for increased equity stakes for the lenders, diluting yourself.  When their stakes get big enough they engage some third parties to do a pump-and-dump.  Some bozo writes the copy, another bozo distributes it.

No credible idea would come public via method 2, they would work through venture capitalists.  So I would tell you without hesitation that there is never a reason to buy a promoted penny stock.  The large holders are the only ones with sufficient economic interest to promote a pump & dump, and they are likely the ones behind the bozos doing the promoting.

One Public Policy Recommendation

We need to codify something here, that if a brochure says in 12 point type: “Call your broker today to discuss how large a position in Circle Star Energy Corp [CRCL] you can comfortably own,”  (This was in the written brochure and not on the web, as far as I have seen.) then any disclaimer in a smaller, or less readable typeface is not valid in court.  This is an implicit form of fraud, and I believe that the writers and distributors of this drivel, as well as those that paid them should be able to be successfully prosecuted for fraud.

One last thing, to the guys who write these “analyses” that display incredible certainty and opportunity in large type, and then say that this is not really an investment analysis in tiny unreadable type — how can you look at yourselves in the mirror when you are such liars and cowards?






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Ethics, public policy, Speculation, Stocks | RSS 2.0 |

One Response to Pennies from Hell

  1. Hiroshi says:

    Ironically, I received the ORYN and CRCL mailers yesterday. The design of the envelope was the same but they were supposedly being sent by two different companies from two different cities in Illinois. Instead of tossing them straight into the recycle bin, I decided to save them to see what kind of scam they were running. I just opened them after reading your post.

    They were both soliciting subscribers to their newsletters while being paid by third party advertisers (for CRCL, Blackrock was paying $1,648,805 to Diamond Spot Media who paid $75,000 to the company sending out the mailer).

    The penny stock “industry” is bigger than I had realized.

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.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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