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.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
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.