A Pox on Promoted Stocks (2)

A Pox on Promoted Stocks (2)

Nova-first-penny-stock-scamBy 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 CORP (OTC:STVF) was originally Legend Mining, which was based in China, and was looking for diamonds in Canada, much as Nova Mining (Nova Mining Corp (OTC:NVMN))

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.

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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.

By David Merkel, CFA of Alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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