Penny Stocks: A Look At The Terrible Performance

Stock Investment Lesson PainAnandKZ / Pixabay

Penny Stocks: A Look At The Terrible Performance

Time for my penny stock scoreboard:

Ticker Date of Article Price @ Article Price @ 1/24/13 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.040

-98.4%

-58.6%

BONZ

10/22/2009

0.35

0.019

-94.6%

-59.2%

BONU

10/22/2009

0.89

0.074

-91.7%

-53.4%

UTOG

3/30/2011

1.55

0.009

-99.4%

-94.1%

OBJE

4/29/2011

116.00

1.780

-98.5%

-90.9%

1:40

LSTG

10/5/2011

1.12

0.061

-94.6%

-89.2%

AERN

10/5/2011

0.0770

0.0002

-99.7%

-99.0%

IRYS

3/15/2012

0.261

0.015

-94.3%

-96.4%

NVMN

3/22/2012

1.47

0.070

-95.2%

-97.3%

STVF

3/28/2012

3.24

0.600

-81.5%

-87.0%

CRCL

5/1/2012

2.22

0.350

-84.2%

-91.9%

ORYN

5/30/2012

0.93

0.280

-69.9%

-84.0%

BRFH

5/30/2012

1.16

0.316

-72.8%

-86.3%

LUXR

6/12/2012

1.59

0.018

-98.9%

-99.93%

IMSC

7/9/2012

1.5

1.480

-1.3%

-2.4%

DIDG

7/18/2012

0.65

0.085

-86.9%

-98.0%

GRPH

11/30/2012

0.8715

0.428

-50.9%

-99.1%

IMNG

12/4/2012

0.76

0.747

-1.7%

-11.6%

1/24/2013

Median

-94.4%

-90.1%

You have to admire the consistency of capital destruction among promoted penny stocks.  Tonight’s loser-in-waiting is Echo Automotive.  Here is the bullet points to illustrate the future carnage:

  • Minimal Revenues
  • Negative net worth
  • Negative earnings and getting worse.
  • Management sucking in a lot in salaries.
  • The long list of stock promoters engaged by DH Media LLC.  This is only the email effort.  They paid $1.9 million to disseminate the shiny, colorful 10? x 14? “newsletter” via snail mail.    They paid $25,000 to the tout that wrote the copy, or maybe, spiffed up DH Media’s bullet points. Add in disclaimers in 5-6 point type.
  • Risk factors list longer than you can shake a stick at.
  • Predecessor company “Canterbury Resources” was pursuing mining interests in New Zealand.
  • Predecessor acquirer company “Controlled Carbon” was working on solutions to reducing carbon emissions.  They now own 70% of the combined company, paying four cents a share for their stake. (So why does it trade at near 80 cents a share now?
  • Now the combined company has some solutions that will double fuel mileage on vehicles that use gas.  What a wonder.

If you really had a technology that could double gas mileage, you would set up a joint venture, or a licensing agreement with one of the major automakers, and divide the profits  off of their high vehicle sales.  You would make a bundle doing that.  You would not buy a shell company in a different industry and let costs get out of control.  That looks like management does not have a real technology, but is simply trying to “take something off the top” through salaries and benefits, and perhaps rewarding friends.  After all, in the stub of the third quarter, Echo blew threw virtually all of the new capital that it raised, and for what?

The company might or might not be affiliated with the promoters.  The promoters say the company is not affiliated with the promotion.  In one scam, Luxeyard [LUXR] a different set of promoters did reveal that the company was paying the promotion to facilitate sales of stock.  The proof is in the pudding.  If Echo goes and does a PIPE or a secondary IPO, maybe there was some hidden affiliation.

The promoter also says they won’t trade for 90 days.  Now, the economics of this one is tough, because the parties that owned “Controlled Carbon” own 70% of Echo Automotive.  Dilution at low prices does not favor them, and I don’t see how they could easily monetize a large portion of their stake.

That leaves the remaining 30% of the company to be traded.  The promoter has spent over 2 million to promote the stock.  Unless he owns a big chunk, and sells into this wave, I don’t see how he makes money.  And if he does sell into the wave, and a lawsuit is brought later, that would stand against them in court that they violated their disclosure.  Maybe they take that risk anyway — they are working at the edge of the law anyway.

Except, maybe a lot of scammers work together as in this example from the FBI.  I’ve posited that idea before.  Given all of the non-identifiable shell companies involved, that could be going on here also.  It would be interesting to try to prove the existence of and break a ring like that.

Anyway, steer clear.  The company is horrid, and with promoters around, those that buy and hold for any significant length of time (say 1-3 months) are 99% certain to lose money.  Don’t be one of the pockets that gets picked.

By David Merkel, CFA of Aleph blog

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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.

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