A Pox on Promoted Stocks

A Pox on Promoted Stocks

A Pox on Promoted StocksUgh. 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.




About the Author

David Merkel
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.