Let’s trot out the promoted stock scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 7/25/13DeclineAnnualizedSplits
GTXO

5/27/2008

2.45

0.014

-99.4%

-62.9%

BONZ

10/22/2009

0.35

0.002

-99.3%

-72.9%

BONU

10/22/2009

0.89

0.007

-99.3%

-72.2%

UTOG

3/30/2011

1.55

0.001

-99.9%

-95.3%

OBJE

4/29/2011

116.00

0.445

-99.6%

-90.8%

1:40

LSTG

10/5/2011

1.12

0.023

-97.9%

-87.2%

AERN

10/5/2011

0.0770

0.0002

-99.7%

-95.7%

IRYS

3/15/2012

0.261

0.000

-100.0%

-100.0%

 Dead
RCGP

3/22/2012

1.47

0.255

-82.7%

-70.6%

STVF

3/28/2012

3.24

0.340

-89.5%

-79.7%

CRCL

5/1/2012

2.22

0.043

-98.0%

-94.9%

ORYN

5/30/2012

0.93

0.090

-90.3%

-84.8%

BRFH

5/30/2012

1.16

0.280

-75.9%

-68.2%

LUXR

6/12/2012

1.59

0.022

-98.6%

-97.1%

IMSC

7/9/2012

1.5

1.100

-26.7%

-24.0%

DIDG

7/18/2012

0.65

0.030

-95.4%

-93.8%

GRPH

11/30/2012

0.8715

0.113

-87.0%

-93.7%

IMNG

12/4/2012

0.76

0.130

-82.9%

-91.2%

ECAU

1/24/2013

1.42

0.262

-81.5%

-94.4%

DPHS

6/3/2013

0.59

0.028

-95.3%

-100.0%

POLR

6/10/2013

5.75

0.400

-93.0%

-100.0%

NORX

6/11/2013

0.91

0.350

-61.5%

-99.0%

ARTH

7/11/2013

1.24

0.385

-69.0%

-100.0%

NAMG

7/25/2013

0.85

1.230

44.7%

6688.9%

8/26/2013

Median

-94.2%

-92.5%

Tonight’s loser in waiting is the same one that I wrote about last time, North American Oil and Gas [NAMG].  This time the Washington Times was spreading the garbage of Tobin Smith via email, as opposed to Bloomberg last time.

But wait, the stock has gone up 45% since I wrote about it.  Doesn’t that mean I am wrong?

No, that’s happened a number of times with the above stocks.  When the promotion ends, so does the stock price.

Two final notes:

1) iTrackr is dead.  Total loss.  Not the next Microsoft or Google.

2) Nova Mining has renamed itself The Radiant Creations Group, Inc. [RCGP].  They have changed their focus from mining to a company that:

engages in the development of various skin protection and hydration, anti-aging, liver health, weight balance, and OTC products. It provides day creams, anti-aging night creams, acne gone and sports block products, and wrinkle repair creams; and weigh control and weight loss products, as well as liver detoxifiers.

Usually, when a promoted stock changes strategies, it changes owners, and that is happening here.  It also likely means there will be a new promotion, where a new pump-and-dump occurs.  You might think that it is a new time for speculating, but the company is trying to buy in shares at a price below the current market price.  Closely held promoted companies offer up all manner of bad surprises for the minority shareholders.  Don’t risk investing here.

 

Okay, time for the promoted stock scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 7/11/13DeclineAnnualizedSplits
GTXO

5/27/2008

2.45

0.012

-99.5%

-64.6%

 
BONZ

10/22/2009

0.35

0.003

-99.3%

-73.2%

 
BONU

10/22/2009

0.89

0.003

-99.7%

-78.6%

 
UTOG

3/30/2011

1.55

0.005

-99.7%

-91.9%

 
OBJE

4/29/2011

116.00

0.305

-99.7%

-93.3%

1:40

LSTG

10/5/2011

1.12

0.031

-97.2%

-86.9%

 
AERN

10/5/2011

0.0770

0.0003

-99.6%

-95.7%

 
IRYS

3/15/2012

0.261

0.003

-98.9%

-96.7%

 
NVMN

3/22/2012

1.47

0.300

-79.6%

-70.5%

 
STVF

3/28/2012

3.24

0.330

-89.8%

-83.1%

 
CRCL

5/1/2012

2.22

0.031

-98.6%

-97.2%

 
ORYN

5/30/2012

0.93

0.154

-83.4%

-80.1%

 
BRFH

5/30/2012

1.16

0.458

-60.5%

-56.6%

 
LUXR

6/12/2012

1.59

0.017

-98.9%

-98.5%

 
IMSC

7/9/2012

1.5

1.260

-16.0%

-15.9%

 
DIDG

7/18/2012

0.65

0.058

-91.1%

-91.5%

 
GRPH

11/30/2012

0.8715

0.141

-83.8%

-94.9%

 
IMNG

12/4/2012

0.76

0.150

-80.3%

-93.3%

 
ECAU

1/24/2013

1.42

0.360

-74.6%

-94.9%

 
DPHS

6/3/2013

0.59

0.040

-93.2%

-100.0%

 
POLR

6/10/2013

5.75

0.600

-89.6%

-100.0%

 
NORX

6/11/2013

0.91

0.440

-51.6%

-100.0%

 

7/11/2013

Median

-92.1%

-92.6%

They are predictably bad.  If anything, the last few promoted stocks have been exceptionally bad.  It makes me wonder whether players play the pump of the pump and dump are getting too numerous.  Maybe after a few more losses like POLR & NORX, there will be fewer players willing to speculate on companies with price momentum that are obviously bogus.

Tonight’s loss-to-be is Arch Therapeutics.  It was a distributor of auto parts that never made a dime of revenue called Almah, Inc., until four months ago.  It did the following:

On April 19, 2013, the Company entered into a Binding Letter of Intent (the “LOI”) with Arch Therapeutics, Inc., a Massachusetts company (“Arch”), in connection with a proposed reverse acquisition transaction between the Company and Arch pursuant to which the Company would enter into a reverse triangular merger with Arch (the “Merger”) and the Company would acquire all of the issued and outstanding capital stock and convertible notes and warrants of Arch in exchange for the issuance of 20,000,000 shares of the Company’s common stock to the shareholders of Arch. Arch operates as a life science company developing polymers containing peptides intended to form gel-like barriers over wounds to stop or control bleeding.

On April 19, 2013, subsequent to the Company’s fiscal quarter ended March 31, 2013, Mr. Powers resigned as the Company’s sole officer and director and Mr. Norchi was appointed as the Company’s director and sole officer, and Mr. Avtar Dhillon was appointed as a director.

On May 10, 2013, pursuant to the terms of the LOI, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Arch and Arch Acquisition Corporation, a Massachusetts corporation and the Company’s wholly-owned subsidiary (“Merger Sub”). In accordance with the Merger Agreement, Merger Sub will merge with and into Arch (the “Merger”), with Arch surviving the Merger upon the terms and subject to the conditions set forth in the Merger Agreement.

As set forth in the Merger Agreement, the Company will acquire all of the issued and outstanding capital stock and convertible notes and warrants of Arch (through a reverse acquisition transaction) in exchange for the issuance to the holders thereof of 20,000,000 shares of the Company’s common stock. The stockholders of Arch will receive two and one-half shares of the Company’s common stock for each share of common stock of Arch held by them immediately prior to the effective time of the Merger.

Almah, no revenues, no earnings, negative net worth. Arch, a “promising” technology company that decides to buy a stock listing buying Almah in a reverse merger.  If the technology were so good, why not remain private and work with private equity, or enter into joint ventures with large medical technology companies that have incredible reach?

It beggars belief that one would merge with a virtually defunct company to build a strong medical technology company.  Leave aside all of the scam language in the promotion.  But here are some examples from the disclaimers:

  • Facts stated in this article were supplied to endorser from third-party sources.
  • XXX has been compensated $10,000 by YYY for endorsing this product, and ZZZ has been paid a $25,000 by YYY for sending out this advertisement.
  • YYY, the third party advertiser, has paid $390,000 USD and is expected to pay an additional $400,000 to WWW as of June 20, 2013 for this advertising effort in an effort to build investor awareness.
  • YYY. represents that it does not own any shares of Arch Therapeutics, Inc. (except for 2,500,000 shares of restricted stock) which YYY. will not sell, pledge or hypothecate or otherwise agree to dispose of for 90 days following the initial dissemination of this advertisement.

If I had a new way of treating wounds that was really effective, I would do it myself privately, or work with private equity.  As it is, this stock promotion is garbage, and not worthy of investment.

The only thing I can’t find is any connection between the promotion and the company.  The promotion doesn’t mention the past, and the company is seemingly not involved in the promotion.  Maybe an owner could be pushing it; they are the only ones that could profit from the promotion.

Time for the promoted penny stock scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 6/3/13DeclineAnnualizedSplits
GTXO

5/27/2008

2.45

0.013

-99.5%

-64.7%

BONZ

10/22/2009

0.35

0.003

-99.1%

-72.7%

BONU

10/22/2009

0.89

0.012

-98.7%

-70.0%

UTOG

3/30/2011

1.55

0.005

-99.7%

-92.8%

OBJE

4/29/2011

116.00

0.630

-99.5%

-91.7%

1:40

LSTG

10/5/2011

1.12

0.033

-97.1%

-88.1%

AERN

10/5/2011

0.0770

0.0002

-99.7%

-97.2%

IRYS

3/15/2012

0.261

0.003

-98.9%

-97.4%

NVMN

3/22/2012

1.47

0.090

-93.9%

-90.3%

STVF

3/28/2012

3.24

0.380

-88.3%

-83.7%

CRCL

5/1/2012

2.22

0.072

-96.8%

-95.7%

ORYN

5/30/2012

0.93

0.150

-83.9%

-83.6%

BRFH

5/30/2012

1.16

0.300

-74.1%

-73.8%

LUXR

6/12/2012

1.59

0.023

-98.6%

-98.7%

IMSC

7/9/2012

1.5

0.990

-34.0%

-37.0%

DIDG

7/18/2012

0.65

0.073

-88.8%

-91.8%

GRPH

11/30/2012

0.8715

0.200

-77.0%

-94.5%

IMNG

12/4/2012

0.76

0.195

-74.3%

-93.6%

ECAU

1/24/2013

1.42

0.440

-69.0%

-96.3%

6/3/2013

Median

-96.8%

-91.7%

Tonight’s loser-in-waiting is Dephasium Corp [DPHS], which surged to a high of 59 cents today, probably off of the promotion of the stock, and the completion of an acquisition.  Here are my bullet points on why this company will fail:

  • No earnings
  • No revenues
  • Negative tangible book value
  • Acquires an asset of dubious value.
  • Formerly known as Expertelligence, Inc, Pay Mobile, Inc, & Allied Ventures Holding Corp.  What do you want to be when you grow up?  Sorry, *if* you grow up.
  • Auditor doubts the the company will continue its existence.
  • Company has consistently lost money through all of its existence.  Has survived through continual dilution of its stock.
  • To do the acquisition, they sold stock at six cents a share.  They bought back stock at three cents per share.  Now it trades at nearly 60 cents per share.  That makes no sense at all.

As for the acquisition, let me quote from the article linked above:

Since 2006, Dephasium Ltd. has launched a program of research and development to become the leader in the field of people protection against electromagnetic waves emitted by mobile phones. Dephasium Ltd. has succeeded in developing an Ancilia product that it believes protects up to 98% of electromagnetic waves issued by cell phones. This conclusion is based upon the results of technology tests administered by Cetecom ICT Services and included in its written report dated August 10, 2009.

Let me get this straight: you have a product that can reduce electromagnetic waves from cell phones, and you are willing to sell it for a piddling 70M shares of this crud company?  Why didn’t you do deals with Samsung, Apple, LG?  If the test is four years old, why don’t you have a big business by now?

The promoter paid $2.7M to advertise Dephasium.  When I googled the promoter and the one paying, I came up with nothing.  The amount paid is more than the value of the company acquired.  The whole thing stinks.

So avoid promoted stocks.  Don’t buy what someone is trying to sell you; buy what you have researched and discovered on your own.

From a reader:

I’ve been following your blog for a little while and appreciate your analysis. I’ve been particularly interested in your coverage on the penny stock phenomenon and started doing some of my own digging. I’ve found a few “companies” that seem to share characteristics with the ones you have highlighted. Digging into the 10-Qs reveals all sorts of red flags around related party transactions, health of balance sheet, past history of management, etc. The question I’ve been trying to answer is how these companies continue to exist? In the cases I list below their sole purpose appears to be to move cash from unwitting investors to the management of the company. 

Would be interested in your perspective.

Wanted to respond to you earlier, but time did not permit.  But thinking about it, I realized that for penny stocks, the most relevant statement to analyze is the Consolidated Statement of Changes in Stockholders’ Equity/Deficit.  You can see what prices they issued stock at.  Proceeds divided by shares gives you the internal valuation of where the company is willing to offer shares.  Few ask, but all should ask, “If the company is willing to issue stock at 30 cents per share for salaries, services, etc., why does the stock trade for $1 per share?”

Sometimes a merger, or a purchase of a business can inject money into a company; sometimes debts are settled for shares. That can temporarily grow the company, and combined with a reverse split, it can give it a share price and a market capitalization that seems respectable.

Number two is the hidden bidding up of the shares through sham transactions where related parties buy & sell at progressively higher prices (netting to no loss, aside from commissions) until some speculators see the microcap stock and start driving it higher, possibly supported by promotional paid research.

But here’s the hard part for me: Sometimes the companies are involved, sometimes not.  Sometimes I can tell how the promoters make money, sometimes I can’t.

This is what I suspect: Promoters have several shell corporations for promotion and trading.  Let’s say one has 4 shells.  When A promotes a stock, B, C, and D trade.  When B promotes a stock, A, C, and D trade.  When C promotes a stock, B, A, and D trade.  When D promotes a stock, B, C, and A trade.   Then each promoter can say they have no economic interest in the stock mentioned that they are “advertising.”

This is an ugly space.  Supposedly you can get a borrow on these bits of financial trash (in order to short them) through Interactive Brokers.

By this time, I would think that it would be worth the the time of penny stock promoters to put a big red X over my house, and not send me any more promotions.  But alas, I got another one, Stevia First, Inc.  This is a weird one, a really, really weird one, as I will attempt to explain.

Stevia First [STVF] was 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 probably no well-managed.  The two skill sets are very different.

Stevia First was a subsidiary of Legend Mining, but through a reverse merger, it became the parent company in 2011.  In the process, the majority of the stock was sold to a new CEO, but that has happened before with this company.  The original interests in the company were priced at a pittance, giving large profits to those who sold them.  The original shares were sold for a small fraction of a penny, and now trade for nearly $2/share.

And what has the company done to deserve this increase in value?  Less than nothing because:

  • There have never been any revenues
  • Income has always been negative
  • Net worth is decidedly negative

That is similar to so many promoted penny stocks.  The valuation is absurd, but remember absurd is like infinity.  Twice infinity is still infinity.  Twice absurd is still absurd.  “The market can remain insane longer than you can remain solvent, as Keynes once said.

I think that the price is so high because speculators are manipulating the price, thinking they can profit off of the momentum, and exit before the crash.  Why do I think this?

Well, as I researched this, reading through the SEC documents, and Googling some search terms, I ran across a series of websites promoting penny stocks, and tracking the promotion of penny stocks.  This was new to me, if there is anyone in my readership that has a more cogent explanation than I am about to give, please give it in the comments.

Here are some of the websites for Stevia First:

When I write about penny stocks, I usually print out the juicy parts of the disclosure because that explains the story, and so I will do here.  It was in 5-point type.  It is a blur until I do OCR.  Maybe we could have a rule that says disclosures must be made in the same font as the largest print in the document.  My but that would cramp their style.

Chuck Hughes and the Microcap Alert Newsletter OWNS NO SHARES, OPTIONS, WARRANTS in Stevia First, Inc (STVF). Also, Stevia First, Inc. has neither approved nor paid for this specific advertisement.  Readers should perform their own due diligence. The information presented is provided for information purposes only and the endorsement is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities. Endorser has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor.

My but that is lousy work.  Every evening, even though I make mistakes, I endeavor to make sure that what I write will help people.  But what of the promoter?

Conmar Capital, Inc., the third party advertiser, has paid $869,500 to Diamond Spot Media, LLC (DSM) as of March 7, 2012 for this advertising effort in an effort to build investor awareness. DSM shall retain any amounts over and above the cost of creating and distributing this advertisement which advertises Chuck Hughes, Microcap Profit Alert Newsletter coverage of Stevia First, Inc. Advertising services include; production, outsourced advertising copywriting services, mailing and other related distribution services and advertising media placement costs. Conmar Capital, Inc., the third party advertiser, is a company based In Belize City, Belize. Conmar Capital, Inc., the third party advertiser, has represented to DSM in writing that it does not own any shares of Stevia First Inc. except for restricted stock which Conmar Capital, Inc. has represented to DSM in writing that it will not sell, pledge or hypothecate or otherwise agree to dispose of forgo days following the initial dissemination of this advertisement Conmar Capital, Inc. has also represented to DSM in writing that neither it nor its affiliates will buy or sell any shares of Stevia First, Inc. during the period that this advertisement is being disseminated by DSM or third party media vendors.

Wait.  Let me get this straight.  You paid $870K for the mailing, and from what I can tell, more than $2 million for advertising in entire so far, and all you have is restricted stock?  With 2/3rds of the stock in the hands of the new and old CEOs, how can they make money?

Here are some ideas:

  • Since the start of the promotion, they have pushed the stock up from nearly 80 cents to nearly two bucks.  That’s a 150% gain.  To cover the $2.4 million paid, they would have had to own at least 2 million shares.  That’s not impossible, but remember, rocket up, rocket down.  Tough to lock in the gain.
  • Maybe they have some implicit, quiet deal with Stevia First management.  After all, they stand to benefit the most from this.  If I were part of the Stevia First management, I would be looking to do some sort of dilutitive deal (like a PIPE) to bring real cash into the company, and allow the company to last.
  • Maybe penny stock promoters are getting more slick.  They don’t speculate on their own deals, but on the deals of others.  Working as a greater group, they earn more money off the rubes that speculate on penny stocks.
  • Maybe they think the pump will hold the price up long enough that they can sell their restricted stock for a profit.

So how well has the pump and dump been working so far?  Pretty well.  But that says nothing about the future.  This is a company with no equity, no income, no assets, no stable management team.  It’s all air.  There are no patents that they own on Stevia.  There are no barriers to entry, so why should an obscure company be worth anything when it has no sustainable competitive advantage?

So far on the penny stocks, I am batting one thousand.  In my opinion, Stevia First will not be an error on my part, but only on the part of those that buy this company.

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.

Photo Credit: Grant || Lotsa zinc there

Photo Credit: Grant || Lotsa zinc there

I haven’t written about promoted penny stocks in a long time.  Tonight I am not writing about promoted stocks, only penny stocks as promoted by a newsletter writer.  He profits from the newsletter.  Ostensibly, he does not front-run his readers.

Before we go on, let me run the promoted stocks scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 12/1/15DeclineAnnualizedDead?
GTXO5/27/20082.450.011-99.6%-51.5% 
BONZ10/22/20090.350.000-99.9%-68.5% 
BONU10/22/20090.890.000-100.0%-100.0% 
UTOG3/30/20111.550.000-100.0%-100.0%Dead
OBJE4/29/2011116.000.000-100.0%-100.0%Dead
LSTG10/5/20111.120.004-99.6%-74.2% 
AERN10/5/20110.07700.0001-99.9%-79.8% 
IRYS3/15/20120.2610.000-100.0%-100.0%Dead
RCGP3/22/20121.470.180-87.8%-43.4% 
STVF3/28/20123.240.070-97.8%-64.7% 
CRCL5/1/20122.220.001-99.9%-87.2% 
ORYN5/30/20120.930.001-99.9%-85.4% 
BRFH5/30/20121.161.000-13.8%-4.1% 
LUXR6/12/20121.590.002-99.9%-86.3% 
IMSC7/9/20121.50.495-67.0%-27.9% 
DIDG7/18/20120.650.000-100.0%-100.0% 
GRPH11/30/20120.87150.013-98.5%-75.4% 
IMNG12/4/20120.760.012-98.4%-75.0% 
ECAU1/24/20131.420.000-100.0%-94.9% 
DPHS6/3/20130.590.005-99.2%-85.5% 
POLR6/10/20135.750.005-99.9%-94.2% 
NORX6/11/20130.910.000-100.0%-97.5% 
ARTH7/11/20131.240.245-80.2%-49.3% 
NAMG7/25/20130.850.000-100.0%-100.0% 
MDDD12/9/20130.790.003-99.7%-94.5% 
TGRO12/30/20131.20.012-99.0%-90.9% 
VEND2/4/20144.340.200-95.4%-81.6% 
HTPG3/18/20140.720.003-99.6%-95.9% 
WSTI6/27/20141.350.000-100.0%-99.9% 
APPG8/1/20141.520.000-100.0%-99.8% 
CDNL1/20/20150.350.035-90.0%-93.1% 
12/1/2015Median-99.9%-87.2%

 

If you want to lose money, it is hard to do it more consistently than this.  No winners out of 31, and only one company looks legit at all — Barfresh.

But what of the newsletter writer?  He seems to have a couple of stylized facts that are misapplied.

  1. Every day, around 45 stocks double or more in price.
  2. Some wealthy investors have bought stocks like these.
  3. Wall Street firms own these stocks but never recommend them to ordinary individuals
  4. The media censors price information about these stocks so you never hear about them

Every day, around 45 stocks double or more in price.

That may be true, but most of those that do double or more in price don’t do so for fundamental reasons; they are often manipulated.  Second, the stocks that do double in price can’t be found in advance — i.e., picking the day that the price will explode.  Third, the prices more often fall hard for these tiny stocks.  Of the 30 stocks mentioned above that were not dead at the time of the last article, 10 fell more than 90% over the 10+ month period.  13 fell less than 90%, 1 broke even, and 7 rose in price.  The median stock fell 61%.  This was during a bull market.

Now you might say, “Wait, these are promoted stocks, of course they fell.”  Only the last one was being actively promoted, so that’s not the answer.

My fourth point is for the few that rise a lot, you can’t invest in them.  The stocks that double or more in a day tend to be the smallest of the stocks.  Two of the 30 stocks listed in the scoreboard rose 900% and 7100% in the 10+ month period since my last article.  How much could you have invested in those stocks?  You could have bought both companies for a little more than $10,000 each.  Anyone waving even a couple hundred bucks could make either stock fly.

So, no, these stocks aren’t a road to riches.  Now the ad has stories as to how much money people made at some point buying the penny stocks.  The odds of stringing several of these successful purchases in succession, parlaying the money into bigger and bigger stocks that double is remote at best, and your odds of losing a lot of it is high.

This idea is a less classy version of the idea promoted in the book 100 to 1 in the Stock Market.  If it is difficult to find the 100-baggers 30 years in advance, it is more difficult to find a stock that is going to double or more tomorrow, much less a bunch of them in succession.  You may as well go to Vegas and bet it all on Double Zero on the roulette wheel four times in a row.  The odds are about that bad, as trying to get rich buying penny stocks.

The ad also lists three stock that at some point fit his paradigm — MeetMe [MEET], PlasmaTech Biopharmaceuticals, Inc. (PTBI) which is now called Abeona Therapeutics Inc. (ABEO), and Organovo (ONVO).  All of these are money-losing companies (MeetMe may be breaking into profitability now) that have survived by selling shares to raise cash.  The stocks have generally been poor.  Have they had volatile days where the price doubled?  At some point, probably, but who could have picked the date in advance, and found liquidity to do a quick in-and-out trade?

The author lists five future situations as a “come on” to get people to subscribe.  I find them dubious.

As for wealthy investors, he mentions two: Icahn pulling of a short squeeze on Voltari (difficult to generalize from), and Soros with PlasmaTech Biopharmaceuticals, Inc.  It should be noted that Soros has a big portfolio with many stocks, and that position was far less than 1% of his assets.  In general, the wealthy do not buy penny stocks.

As for brokers and the media not mentioning penny stocks, that is being responsible.  The brokers could get in hot water for recommending or buying penny stocks even under a weak suitability standard.  The media also does not want to be blamed for inciting destructive speculation.  Retail investors lose enough money through uninformed trading, why encourage them to do it where fundamentals are typically quite poor.

I’ve written two other pieces on less liquid stocks to try to explain the market better: On Penny Stocks and Good Over-the-Counter “Pink” Stocks.  It’s not as if there isn’t value in some of the stocks that “fly under the radar.”  That said, you have to be extra careful.

Near the end of the ad, the writer describes how he is being extra careful also.  Many of his rules make a lot of sense.  That said, following those rules will get you boring companies that won’t double or more in a day.  And that’s not a bad thing.  Most significant money is made slowly — it doesn’t come in a year, much less in a day.

That said, I recommend against the newsletter because of the way that it tries to attract people.  The rhetoric is over the top, and appeals to those who sense conspiracies keeping them from riches, so join my club where I hand out my secret knowledge so you can benefit.

In summary, as a first approximation, don’t invest in penny stocks.  The odds are against you.  Fools rush in where angels fear to tread.  Don’t let greed get the better of you — after all, what is being illustrated is an illusion that  retail investors can’t generally achieve.

If you want to know what is the core problem of the average person approaching the market (though this applies more to males than females, women have more native caution on average), it is chasing a hot idea.  This can take a number of forms:

  • Getting tips from friends who have bought some stock that is currently popular in the market.
  • Doing the same thing with investors who talk or write about investing.  The best investment advice is not flashy, and does not make for good video.
  • Looking at charts and buying something that is rising rapidly, because popular media say this is “The Next Big Thing.”
  • Buying the mutual fund or other pooled vehicle of some manager who has done very well in the past, and seems to never fail.  (If you buy a mutual fund, don’t buy one that has had a lot of money pile into it recently… usually a bad sign.  Spend more time to see if the manager thinks in a businesslike way about assets that he buys.)
  • Going to a broker who is very well-dressed and confident, and talks really well, but who has no obligation to act in your best interests.  If you don’t know how he is earning his money from you, avoid him, because it usually means investments with high fees or hidden ways that you can lose, e.g. structured notes that offer a nice yield, but where possibilities to lose are more significant than you think.  At best, he will give you consensus ideas and managers that deliver him above average remuneration.
  • Buying the newsletter of some overly confident person who claims to know the secrets of the market, which he will share with you and 100,000 other close friends for a mere $299/year!  (Please read Mark Hulbert before buying a newsletter.)
  • Worse yet, giving into the fakery of those who try to bring you into a hidden opportunity.  It can be a Ponzi scheme, a promoted stock, but they suggest returns that are huge… or, like Madoff, decent but not exorbitant returns that are altogether too regular.

Many of these appeal to our desire to get something for nothing, which is endemic — we all have it to some degree, and marketers play off this regularly by offering us “free” this, and “free” that.  Earning returns from your investable assets is a business in its own right, and there are costs to doing it well.  You should not be surprised that doing well with it will take some time and effort.

You also have to avoid the impulse that there is some hidden knowledge, or group of insiders that have found an easy road to riches.  The markets aren’t rigged in any material way.  The principles of investing are well-known, but applying them takes creativity, time and effort.  There are no significant players with a new theory who make amazing money investing in secondary markets for stocks and bonds.

Most of the things that I listed above involve low-thought imitation of others.  There is little advantage in investing to mimicry.  Even if it worked for someone else, the prices are different now, and easy gains have been made.  You will do worse than the one you are trying to imitate with virtual certainty, and likely worse than average.  You need to plan to take an independent course, and learn enough such that if you do choose to use advice of any sort, that you can evaluate it rationally.  If you choose to do it yourself, you will need to learn more than that.  It takes effort, but that effort will pay off, if not in investing itself, but there are spillover effects in intelligent management of your finances, and in improving your abilities in the businesses that you serve.

In most areas of life, most things that pay off well take effort.  If people present you with easy or hidden ways to make above average money, be skeptical.  Doing it right takes discipline and effort.  (If you want the easy route while avoiding all the pitfalls see the postscript.  It is boring, but it works.)

Postscript

As an aside — you can always index, and beat most average investors over the long haul.  Buy broad funds that invest in a large fraction of all of the stocks that there are, and those that replicate the bond market as a whole.  Make sure they have low fees.  Buy them, hold them, and be done.  You will still face one hurdle: will you be able to maintain your strategy when everything is in a crisis, or when your friends tell you they are earning a lot more than you, and it is easy to do it?  Size the bond portion of your assets to the level where you can sleep soundly in all circumstances, and you will be fine.

 

How does capital get allocated to the public stock markets?  Through the following means:

  • Initial Public Offerings [IPOs]
  • Follow-on offerings of stock (including PIPEs, etc.)
  • Employees who give up wage income in exchange for stock, or contingent stock (options)
  • Through rights offerings
  • Company-issued warrants and convertible preferred stock, bonds, and bank debt (rare)
  • Receiving equity in exchange for other claims in bankruptcy
  • Issuing stock to pay for the purchase of a private company
  • And other less common ways, such as promoted stocks giving cheap shares to vendors to pay for goods or services rendered.  (spit, spit)

How does capital get allocated away from the public stock markets?  Through the following means:

  • Companies getting acquired with payment fully or partially in cash.  (including going private)
  • Buybacks, including tender offers
  • Dividends
  • Buying for cash company-issued warrants and convertible preferred stock, bonds, and bank debt
  • Going dark transactions are arguable — the company is still public, but no longer has to publish data publicly.

I’m sure there are more for each of the above categories, but I think I got the big ones.  But note what largely does not matter:

  • The stock price going up or down, and
  • who owns the stock

Now, I have previously commented on how the stock price does have an effect on the actual business of the company, even if the effects are of the second order:

My initial main point is this: capital allocation to public companies does not in any large way depend on what happens in secondary market stock trading, but on what happens in the primary market, where shares are traded for cash or something else in place of cash.  When that happens, businessmen make decisions as to whether the cash is worth giving up in exchange for the new shares, or shares getting retired in exchange for cash.

In the secondary market, companies do not directly get any additional capital from all the trading that goes on.  Also, in the long run, stocks don’t care who owns them.  The prices of the stocks will eventually reflect the value of the underlying claims on the business, with a lot of noise in the process.

My second main point is this: as a result, indexing, or any other secondary market investment management strategy does not affect capital allocation much at all.  Companies going into an index for the first time typically have been public for some time, and do not issue new shares as a direct consequence of going into the index.  The price may jump, but that does not affect capital allocation unless the company does decide to issue new shares to take advantage of captive index buyers who can’t sell, which doesn’t happen often.

The same is true in reverse for companies that get kicked out of an index: they do not buy back and retire shares as a direct consequence of going into the index.  They may buy back shares when the price falls, but not because there aren’t indexers in the stock anymore.

So why did I write about this this evening?  I get an email each week from Evergreen Gavekal, and generally, I recommend it.  Generally it is pretty erudite, so if you want to get it, email them and ask for it.

In their most recent email, Charles Gave (a genuinely bright guy that I usually agree with) argues that indexing is inherently socialist because you lose discipline in capital allocation, and allocate to companies in proportion to their market capitalization, which is inherently pro-momentum, and favors large companies that have few good opportunities to deploy capital.

I agree that indexing is slightly pro-momentum as a strategy, and maybe, that you can do better if you remove the biggest companies out of your portfolio.  Where I don’t agree is that indexing changes capital allocation to companies all that much, because no cash gets allocated to or from companies as a result of being in an index.  As a result, indexing is not an inherently socialistic strategy, as Gave states.

Rather, it is a free-market strategy, because no one is constrained to do it, and it shrinks the economic take of the fund management industry, which is good for outside passive minority investors.  Let clever active managers earn their relatively high fees, but for most people who can’t identify those managers, let them index.

If indexing did lead to misallocation of capital, we would expect to see non-indexed assets outperform indexed over the long haul.  In general, we don’t see that, and so I would argue the indexing is beneficial to the investing public.

I write this as one who makes all of his money off of active value investing, so I have no interest in promoting indexing for its own sake.  I just agree with Buffett that most people should index unless they know a clever active manager.

Photo Credit: Jen Goellnitz

Photo Credit: Jen Goellnitz

Okay, let’s roll the promoted stocks scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 1/20/15DeclineAnnualizedDead?
GTXO5/27/20082.450.011-99.6%-55.6%
BONZ10/22/20090.350.000-99.9%-72.5%
BONU10/22/20090.890.000-100.0%-82.3%
UTOG3/30/20111.550.000-100.0%-92.0%Dead
OBJE4/29/2011116.000.069-99.9%-86.3%Dead
LSTG10/5/20111.120.004-99.7%-82.5%
AERN10/5/20110.07700.0000-100.0%-93.4%Dead
IRYS3/15/20120.2610.000-100.0%-100.0%Dead
RCGP3/22/20121.470.003-99.8%-89.5%
STVF3/28/20123.240.360-88.9%-54.2%
CRCL5/1/20122.220.004-99.8%-90.2%
ORYN5/30/20120.930.013-98.6%-80.1%
BRFH5/30/20121.160.466-59.8%-29.2%
LUXR6/12/20121.590.002-99.9%-92.3%
IMSC7/9/20121.50.910-39.3%-17.9%
DIDG7/18/20120.650.003-99.6%-89.1%
GRPH11/30/20120.87150.021-97.6%-82.5%
IMNG12/4/20120.760.010-98.7%-86.9%
ECAU1/24/20131.420.000-100.0%-98.4%
DPHS6/3/20130.590.003-99.5%-96.0%
POLR6/10/20135.750.001-100.0%-99.5%
NORX6/11/20130.910.008-99.1%-94.7%
ARTH7/11/20131.240.200-83.9%-69.7%
NAMG7/25/20130.850.013-98.5%-94.1%
MDDD12/9/20130.790.022-97.2%-95.9%
TGRO12/30/20131.20.056-95.3%-94.5%
VEND2/4/20144.340.655-84.9%-86.1%
HTPG3/18/20140.720.008-98.9%-99.5%
WSTI6/27/20141.350.150-88.9%-97.9%
APPG8/1/20141.520.035-97.7%-100.0%
1/20/2015Median-99.3%-89.8%

It is truly amazing how predictable the losses are from promoted stocks, and that is why you should never buy them. Today’s loser-in-waiting is Cardinal Resources [CDNL].  The promoters purport that this company will provide cheap clean fresh water to the world, and will make a fortune off of that.  Now let’s look at some facts:

What commends this stock to you?  Is it:

  • That it has never earned any money?
  • That the firm has had a negative net worth for the last four years?
  • That their auditors doubted on the last 10-K that this company would be a “going concern?”
  • That the company 12 months ago was known as JH Designs, which was in the “home staging and interior design services business?”
  • That the writers of the promotion got paid $30,000 to write the speculative fiction of the promotion?
  • That affiliated shareholders of CDNL paid another $670,000 to publish speculative fiction about the company to unwitting people in an effort to raise the stock price, so that they can sell their shares?

Here, have a look at part of the disclaimer written in five-point type on the glossy ad they sent me in the mail:

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

Thus, we know who is sponsoring and profiting from this scam.  It is existing shareholders who want to sell.  I can tell you with certainty that you should not buy this, and that if you own it, you should sell it.  There is one significant party that implicitly agrees with that assessment — the company itself, which issued shares at a price of ten cents per share in 2014, according to the recent 10-Q, if you look at the balance sheet and cash flow statements.

Avoid this company, and avoid all situations where stocks are promoted.  They are bad news for all investors.  Good investments never need promotion.