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Penny stocks almost always promise more than they deliver Knight Ridder/Tribune Business - October 27, 2005 4:01 PM (EDT)
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By Will Deener, The Dallas Morning News
Oct. 27--The constant stream of spam e-mails that push obscure penny stocks with vaporous hyperbole can wear down even the most conservative investor.
If Diddly Squat Inc. is priced at a penny per share, a rise of just one penny will double your money. It's a sure thing! Or it could be, maybe. Hey, why not?
If you've ever wondered, in a moment of weakness, if these spam-pitched penny stocks really deliver, here's your answer:
No, they don't.
A study of 37 penny stocks touted in more than 1,000 spam e-mails during May and June shows that only two have risen in price since. Savvy Software, a web content management company in Portsmouth, N.H., is tracking the returns at www.spamstocktracker.com.
A portfolio built around these can't-miss stocks has lost nearly half its value.
"I got to wondering what happens to the average Joe who follows the advice of these hot stock tips," said Joshua Cyr, chief of technology for Savvy Software. "What I found was that almost every single one of these stocks plummeted."
Mr. Cyr's study offers a window on the shadowy world of over-the-counter stock trading. These thinly traded stocks are noted for sharp price moves, up and down.
While money can be made on penny stocks that are legitimately on their way up, many of these companies are also flirting with insolvency. The companies often are difficult to research, and Wall Street analysts pay them almost no attention.
That left Mr. Cyr curious. He wondered what would happen if someone bought 1,000 shares of each of the stocks touted in the junk e-mails he received.
He theoretically invested $17,405 in May and June. As of Wednesday the portfolio is down to $9,021.70, a loss of 48 percent. Many of the stocks were down 75 percent to 90 percent; some lost all their value.
"Going into this, I thought I would probably break even," Mr. Cyr said. "I thought I would have at least a handful of big winners to balance out the losses. What I found was that even in the short run, most all of them went down."
The biggest exception was Irving-based Sniffex Inc., which makes an explosive detection device. Its shares more than doubled from $1.17 to $3.00 as governments worldwide pushed demand for its product higher.
Penny stocks trade in the so-called over-the-counter market. Public companies that can't meet the listing requirements of one of the major exchanges, such as the New York Stock Exchange or Nasdaq Stock Market, trade on the OTC Bulletin Board.
With less regulation and supervision, many OTC stocks are vulnerable to manipulation in pump-and-dump schemes. Spammers try to push up stock prices with florid prose about a company's prospects -- the pump. If successful, the shares are quickly sold for a profit -- the dump.
Many times the companies aren't even aware that their stock is being hyped. One of the junk e-mails that Mr. Cyr received touted the prospects of Montana Oil and Gas Inc., a tiny energy exploration company in Vancouver, Canada.
The e-mail began: "This new stock is about to explode." It went on to explain that Montana Oil specializes in turning unproductive oil and gas deposits into profitable enterprises.
That may be true, but the stock wasn't ready to explode. Since early May, shares of Montana Oil have dropped from 25 cents to 16 cents. Jason Ashdown, manager of Montana's investor relations, said he has tried to track down where the spams originate but it's next to impossible.
"The spammers are good at hiding themselves," Mr. Ashdown said. "I wish they would stop, because it gives the company a bad name."
He said he believes the spam comes from people who own the stock.
"We really can't stop people from promoting a stock they own," he said.
Some investors mistakenly believe that the OTC is part of the highly regulated Nasdaq Stock Market. It's not. The Nasdaq only provides the technology to operate the quotation service called the OTC Bulletin Board, which displays real-time quotes and volume information. The OTC Bulletin Board service is owned and regulated by the National Association of Securities Dealers.
The only requirement for a company to be quoted on the Bulletin Board is that it must be current in its financial filings with the Securities and Exchange Commission. The SEC has regulatory responsibility over OTC companies, just as it does for all publicly traded companies.
The volume of shares traded in the over-the-counter market surged to almost 40 billion in August, up 49 percent from the previous month, according to the Leuthold Group, a Minneapolis money management firm. In fact, there were some months last year when volume in the OTC market surpassed the volume of the Nasdaq Stock Market.
"The volume is down from its peak of more than 50 billion in early 2004, but it is still high and indicates a speculative appetite among investors," said Eric Bjorgen, a senior research strategist at Leuthold.
Trading volume for most of the companies that Mr. Cyr tracked was only a few thousand shares a day.
Although buying penny stocks is risky business, those who still can't resist the temptation should listen to the advice of someone who works in this corner of the stock market.
Peter Leeds, who writes a Toronto-based newsletter on the subject, said it's possible to make money on penny stocks, but most people don't know how. He said investors should always make sure the company is profitable, with a legitimate business and products.
"I look for penny stocks that have good fundamentals," he said. "You are speculating, so you at least need to make sure the companies are financially healthy. That's even more important with these smaller companies than bigger ones."
The problem with investing in small companies is that one slip-up -- one contract that falls through, for example -- can derail the stock.
In any case, he said, never invest in a stock based on a random e-mail tip. It is nearly always misleading.
"There is hidden motivation in these unsolicited emails," Mr. Leeds said. "Usually, if someone can push the stock higher by telling everyone to buy, they are probably selling their shares for a profit."
That is called, appropriately enough, scalping.
PENNY LOAFERS
A portfolio of 1,000 shares of each of the 37 spam-pitched penny stocks would look like this:
To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com.
Copyright (c) 2005, The Dallas Morning News
Distributed by Knight Ridder/Tribune Business News.
For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints*krtinfo.com. SNFX,
Posts: 604 | Registered: Aug 2005
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posted
I think they are mostly talking about the worthless pinksheet pos that these scamy newsletter get paid to tout.
Posts: 604 | Registered: Aug 2005
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I don't understand why spam emailers are still trying to pump stocks that way. I have yet to see one that actually spiked either in price or in volume after seeing it in an e-mail. Truth be known.... email is nothing compared to message boards when it comes to pump n dump scams.
-------------------- Spend Word For Word With Me And I Shall Make Your Wit Bankrupt. Posts: 1326 | From: Here | Registered: Oct 2005
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posted
Very true. Email spam runs through my box and gets the delete key faster than I can read the title. I don't pay attention to anything that says "This one is gonna go up! We know it! Don't worry!" How bout telling me why first lol
-------------------- This is some pretty gay Mc. Bestiality. Posts: 948 | From: Boston, MA | Registered: Oct 2005
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<golfman>
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posted
Oh sure Mr article guy. It makes much more sense buying 1 share of Google then 50,000 shares of GZFX!
What is wrong with these people? Another attempt at stopping the regular guy from getting rich.
It is not that hard finding a legit penny stock!
BRVO, GZFX, FMLY, DNAG.
THERE YOU GO. All legit stocks that have a huge chance of retiring on.
EVERYONE SHOULD OWN THE PENNYS. From 18 yrs old on.
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<golfman>
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posted
Tell the article guy that Brvo went from .10 up to $1.35.
No mention of that anyplace that people made 13x their investment money.
Why are the rags to riches storys never published anyplace or put on tv?
It just kills me that this is never mentioned. Im sure it bothers others also on here.
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Google is beautifully safe when you have the cash to invest. I still invest in the very hot pennies but I don't focus on them very much usually. However, I've dropped goog for awhile so I can take on some fun in pennyland with GZFX. Google isn't worth even bothering with unless I can play with 200 shares all day.
That article shouldn't stop any of us. All it says is "Oh, poor Johny blindly spread all his money into random penny stocks and lost all his money." Learn the game then play. This isn't the 10%/year gameshow this is the real money. Next best thing to options
-------------------- This is some pretty gay Mc. Bestiality. Posts: 948 | From: Boston, MA | Registered: Oct 2005
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<shortingpinks>
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Someone claimed they called Ameritrade and was told they can short pinks, can anyone confirm this?
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Yep... otc stocks are now shortable... Penny stocks are about to get fun again... Shorting pennies in no way means all otc stocks are going to plummet.... it means the swings will be wider, which makes us all richer in the end. Good Luck To All
-------------------- Spend Word For Word With Me And I Shall Make Your Wit Bankrupt. Posts: 1326 | From: Here | Registered: Oct 2005
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