Skip to content

How to Tell if Your Next Penny Stock Play Is Legit

By Jonas Elmerraji, Penny Stock Fortunes

There’s no question about it — penny stocks can bring home some of the biggest gains in the investment world. But those tiny companies can also bring along quite a bit of risk. In fact, one of the biggest questions we get here at Penny Sleuth HQ is: “Can you tell me if XYZ Corp. is legit?” And while we can’t give out personalized investment advice, we can give you the tools to determine whether you’re investing in a business with serious profit potential or a scamster’s shell game…

Here’s how to know if your next penny stock play is legit…

For many investors, the idea that a stock could be representing itself incorrectly is unthinkable. After all, we’ve got the SEC, the exchanges — like NYSE and NASDAQ — and independent auditors taking a look at every filing that a company puts out to shareholders. But in the world of microcap stocks, many of those same protections just aren’t there.

While Securities and Exchange Commission (SEC) was created, in part, to protect investors from nefarious activities in the stock market, the countless securities scandals of the last couple of years have shown us that the agency simply doesn’t have the resources to make sure that the smallest companies are reporting accurately. And in fact, many of the smallest microcap stocks are completely exempt from reporting to the SEC.

Serious listing requirements (almost always) ensure that stocks trading on major exchanges are legitimate businesses, but for stocks that trade OTC or on the Pink Sheets, the requirements to get shares trading are slim to none.

And while most investors think of audited financials as a safeguard that keeps a company’s financials accurate, many companies also aren’t required to get their books audited because of their size.

Even if you’re thinking about investing in a Pink Sheets stock that’s exempt from registering with the SEC and getting an audit performed, you might still be looking at a perfectly good penny stock investment…but you have to do your homework.

Verify the Business

The first step to determining whether a penny stock is legitimate is to verify that the business exists and does what you think it does.

You can start off by entering the stock’s ticker on a major financial site — like Google Finance — and checking out the description of the company. Those descriptions come from SEC filings, so you can generally trust what they say since thanks to the Sarbanes-Oxley Act, it’s a felony for management to lie on company filings.

Also, log onto the SEC’s website and look for company filings to get the full look at a company’s operations. And don’t forget to look at its ticker…an “E” at the end means that the company is delinquent in providing its regulatory filings — a very big red flag.

For companies small enough to not file with the SEC, ask your broker for a copy of the company’s “Rule 15c2-11 file.” In it, you’ll find a slew of information that the company was required to provide to prove their exempt status.

Check the Auditor

When you’re reading a company’s financials on the SEC website, look for the audit opinion (generally near the end of a 10-K annual report filing). It’s a statement from the independent auditors that explains the steps an auditor took to verify a company’s financials as well as whether the financials are accurate in their opinion.

Checking who the auditor is makes a big difference too. Bernie Madoff’s “independent” auditor was neither — he trusted Madoff too, blindly signing off on the scamster’s financials and losing millions of his own in the process. Checking into the accountant’s CPA firm would have showed that it was a tiny storefront with only one CPA and without the manpower to audit a multi-billion dollar financial firm.

Getting audited by one of the “big four” accounting firms — PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young — is generally the domain of big blue chips that can afford to have prestigious accounting firms handle the audit, so don’t stress if the auditor’s name doesn’t look familiar. Take the time to research who the auditor is, though, and whether they’re qualified to handle a company audit. A quick Google search should solve that…

Give Them a Call

Hard-to-find contact information is another red flag that should be watched out for. Since most companies are constantly on the lookout for new business, their sales team should at least be easily accessible. If you have concerns about whether or not the company is legit, go ahead and call the phone number on their website. If you can’t find a number or address, check back on the SEC website — companies have to include their corporate contact information on the cover of all 10-K and 10-Q filings.

New technology has also made it much easier to verify a business’s contact information. Just type in a company’s address into Google Maps, and select “Street View,” and you can actually see the building where its offices are located. If the offices for a publicly traded stock are showing up as someone’s home or a mailbox rental store, be very wary of going forward.

Follow the Money

If you really want to know about a company, you have to follow the money — its customers…

For any company that markets its products to consumers, a quick web search should give you an idea of how well — or poorly — the company is treating the people who use its services. Reading customer experiences will also give you an idea of whether or not people are jibing with the company’s offerings.

Googling your way to customer experiences isn’t always an option, especially when a company caters to enterprise or government clients. In these cases, where more money is generally involved, lawsuits are more likely as a result of business disputes. Check an online legal database — like the U.S. PACER System — to see whether your potential microcap investment is being sued by customers.

Check for Promotions

It’s possible for a company to be legitimate while the news that “independent parties” are touting isn’t. These so called “stock promoters” are publishing faux research reports and stock recommendations in hopes that investors will catch on to the penny stocks they’re selling. They do this through websites and newsletters that seem legitimate on the surface, but are essentially nothing more than schemes to get people to buy these stocks.

While we’ve never accepted money to write about any stock here at the Sleuth, some in the industry do… And believe it or not, it’s completely legal as far as the SEC is concerned.

There are a few ways that you can tell whether a stock’s being pumped by a promoter. For starters, go to the horse’s mouth — check out StockPromoters.com — the site features a listing of which stocks are paying for which promoters, as well as what the promoters are getting in return.

Promoters aren’t ashamed about what they do — they want companies to know how good they are at their jobs…that’s why they’re so easy to spot.

More Homework, More Profits

To be sure, doing the research is tough and time consuming. But it’s also the only way to be completely sure that the next penny stock play you’re putting your hard earned money on the line for is legit. Small stocks have some of the greatest gain potential out there — and if you know what to look for, you can make sure that you don’t get burned in the process of pursuing profits.

Posted in Education, penny stock trading. Tagged with , , , , .

By troy
November 19, 2009

No comments

BoldStocks.com: Hot Tips on Bad Stocks

Published by Vancouver Sun

By David Baines

It started last Saturday with a teaser. A penny stock promotion service called BoldStocks.com sent me an e-mail saying it was going to recommend a stock on Monday. The stock’s identity would remain a secret until then, but “Mr. Bold” offered a hint: “It could not be more timely.”

On Sunday morning, there was another hint: “Don’t leave home without it.” And in the evening, yet another: “More than 10 years in business with stable management and key researchers.”

On Monday, the mystery company was revealed: Skinvisible Inc., a Las Vegas-based company that has developed a hand sanitizer to prevent the spread of the H1N1 virus.

Boldstocks.com is one of several Internet tout services run by Pentony LLC of Frisco, Tex. The disclaimer revealed that Skinvisible had paid Pentony 500,000 restricted shares to stage this little game.

At the close of business on Monday, “Mr. Bold” proudly announced that Skinvisible, which trades on the OTC Bulletin Board in the United States, had closed up seven per cent on double the usual trading volume. But keep in mind, this is a penny dreadful where percentages can be very misleading. The absolute increase was one cent, to a grand total of 15 cents.

Skinvisible claims its “DermSafe chlorhexidine hand sanitizer has been tested against many bacteria and viruses. It has been proven to kill / inactivate a number of influenza A viruses; including a strain of H1N1, the swine flu virus.”

But there are lots of effective hand sanitizers already on the market (including plain old soap). The difference is that Skinvisible claims it has a patented ingredient that fights germs up to four hours after washing, but this has not been proven.

In the United States, the product requires Federal Drug Administration approval before it can claim to combat swine flu. It has not received that approval. In Canada, the product has been approved by Health Canada for personal use only.

A few days ago, the company announced it has sold licensing rights to a distributor for all of Singapore, Malaysia, Thailand, Indonesia and the Philippines. This might be encouraging, but for two things: Payment terms were not disclosed, and the announcement was made by Terry Howlett, the company’s president and CEO.

Howlett is well known to me as a former Howe Street denizen who learned very early in his career that a promoter, like a virus, has to adapt quickly to its environment to survive.

Howlett’s first Howe Street adventure, Presley Laboratories Inc., was listed on the Vancouver Stock Exchange in April 1987.

It began as a multi-level marketer of “Lady Love” cosmetics and hair products, but soon switched gears and announced it would acquire Modern Electronics Inc., which had developed a security system for buildings.

By June that year, the company was referring to Modern as its “wholly owned subsidiary” and projecting sales of $500,000 the first year and $1 million the second. But several months later, Howlett announced the “proposed” acquisition had fallen through. More premature exclamations would follow.

In September 1988, Howlett announced Presley would market a telephone touch-tone order entry system developed by a person named Jerry Hodge of Irving, Tex. (A dozen years later, Hodge would pop up again in Skinvisible.)

In February 1989, Howlett announced a letter of intent to sell 10 systems worth $665,000 to a Calgary company over the next six months. Projected sales over the next year were $3.3 million.

But within several months, he announced this deal had also fallen through. Instead, the company would sell marketing and software rights to the ordering system to a Vancouver company for $5.5 million. This also fell apart.

In January 1990, Howe Street bon vivant Harry Moll — who was building a VSE mini-conglomerate called Pineridge Capital Group — acquired a controlling interest in Presley from Howlett.

Howlett — who remained as chairman — kept churning out good news. He said the company’s Canadian dealer would buy $6 million worth of product over the next 12 months. And that was just Canada. Marketing in the U.S. would start in September 1990.

As always, the proof was in the financial statements. Total sales for the two years ending July 1991 — when Howlett was promising millions of dollars in revenues — were only $98,000, and losses were a whopping $1.3 million.

In 1992, Moll’s mini-conglomerate collapsed in scandal. It was revealed he had sold hundreds of thousands of dollars worth of shares in Presley and several other Moll-controlled companies to the Wolverhampton municipal pension fund in England. That raised the question, what was a supposedly sober fund like this doing in flaky stocks like these?

The fund manager was later fired, raising suggestions that he had been taking bribes. Moll denied he had provided any special incentives: “Just lunch, and a cocktail or two,” he said.

Then-B.C. premier Glen Clark was sufficiently alarmed by Moll’s antics that he commissioned a government inquiry into regulation of the exchange. VSE officials, meanwhile, blackballed Moll from any association with its listed companies.

In the wake of this scandal, Moll returned control of Presley — which by this time had been renamed Voice-It Technologies Inc. — to Howlett.

Without missing a beat, Howlett announced the touch-tone ordering system would be used in a venture called Talking Flowers, which enabled people to send flowers and talking messages to their loved ones. It was also a flop.

Howlett made more breath-taking announcements that never amounted to anything. By June 1997, he resigned as director and president. The company limped along until March 1999, when it was suspended for failure to file financial statements, then delisted for failing to pay its listing fees.

In 2000, Howlett reunited with his old pal Hodge and his buddy Moll — even though he had been thoroughly disgraced by now — and took Skinvisible public on the bulletin board.

In his usual style, Howlett has been spewing a steady stream of boosterish announcements, but they haven’t amounted to much. During the six months ending June 30, the company reported $146,976 US in sales while racking up another $879,621 in losses, raising its cumulative losses to $17.8 million. Total assets were only $195,938 against $746,484 in liabilities, which means the company is basically insolvent.

Howlett said during a brief telephone interview this week that he now lives in Las Vegas, where the company’s head office is located. He said Moll and Hodge are no longer involved.

I asked what he thought of the BoldStocks.com hype. He said he had nothing to do with it, which is strange considering that Pentony says the company paid 500,000 shares for the service.

Asked what he thinks of that style of promotion, he replied, “I have no opinion on it.”

That was an astute answer. I mean, who wants to spoil their own party?

Link to Original Article: http://www.vancouversun.com/life/Bold+serves+stock/2196188/story.html

Posted in Uncategorized. Tagged with , , , .

By troy
November 16, 2009

No comments

Trading’s Wild West cleans up its act — with caveats

Originally Printed in Financial Post

By: Janet Whitman

As U.S. lawmakers mull a crackdown on murky trading activities such as dark pools and high-frequency trading, another unregulated sector of the market known as the Wild West of stock trading is cleaning up its own act.

The Pink Sheets has long been the home for stocks too thinly traded, too tiny or too financially ailing to list on a senior stock exchange. But since it started introducing new transparency initiatives, including a trading risk-ranking system a couple of years ago, the over-the-counter venue has attracted a growing list of big names, from German sportswear maker Adidas AG to Swiss drug maker Roche Holding Ltd.

The new OTCQX trading platform for premium listings being offered by Pink OTC Markets Inc., as the company is formally known, is expected to double its listings of Canadian companies by the end of this year.

“We have taken great strides to make the OTC market more friendly to investors,” says Tim Ryan, managing director of sales and business development for New York City-based Pink OTC Markets. “Stocks that trade on the pink sheets are categorized by their amount of disclosure. For a company that doesn’t provide disclosure, we flag it with a stop sign [icon]. We don’t stop trading in it, but we say investors should look both ways.”

For even shadier listings, including possible “pump-and-dump” stock promotion scams among the 5,000 or so stocks it quotes, the Pink Sheets slaps them with a black skull-and-crossbones warning label.

At the opposite end of the spectrum is the OTCQX listing service, set up to highlight reputable companies.

The QX, which stands for quality and excellence, doesn’t require foreign companies to make filings with the U.S. Securities and Exchange Commission nor do they need comply with burdensome accounting regulations that are part of the Sarbanes Oxley Act, a huge cost savings.

Instead, Canadian companies can use the filings they make with the Toronto Stock Exchange.

“The OTCQX opens the door for these companies to the vast U.S. retail market,” says Mr. Ryan.

It can also help improve demand in the companies’ home market.

Beyond a 373% surge in trading in the United States within three months of joining the OTCQX, Canadian companies have seen their trading volumes jump 54% on the Toronto Stock Exchange, according to data from Pink OTC Markets.

Avalon Rare Metals Inc., Globex Mining Enterprises Inc., Azure Dynamics Corp., China Education Resources Inc. and Alter NRG Inc. are among the Canadian companies that make up about 10% of the OTCQX’s 74 listings.

Officials at Pink OTC Markets, which debuted in 2007, say they’re getting a flurry of applications from Canadian companies this year.

Even with the improved disclosure efforts, industry observers doubt the Pink Sheets will eradicate fully its Wild West mentality.

“The Pink Sheets still has a whole realm of penny stocks that has always given the SEC problems,” says James Angel, a professor at Georgetown University in Washington D.C. who specializes in the structure and regulation of financial markets around the world. “A lot of little companies there are scams waiting to happen, so the SEC has a real enforcement nightmare.”

Nevertheless, the agency isn’t likely to come down on the Pink Sheets. Regulators recognize that small companies need a place to raise capital without the burden of registering and filing financial reports with the SEC. Perhaps more significantly, the SEC and U.S. Congress are much more preoccupied with other concerns, such as tightening up regulations on high-frequency trading, dark pools of capital and short-selling.

“The pink sheets are a small niche representing a very tiny slice of overall U.S. equity market value and a very small slice of trade volume,” says Prof. Angel. “The complaints the SEC gets in that space are usually about an individual company that’s fraudulent. They’re not getting a huge number of complaints about trading practices.” For savvy traders, the

Pink Sheets can offer a good opportunity to clean up.

Anthony Marchese, general partner at Insiders Trend Fund, a New York hedge fund that has a portfolio built around insider-trading activity, says he often prefers to buy stocks on the Pink Sheets rather than on more reputable, regulated exchanges.

“A lot of people aren’t able to buy those stocks, so there’s less competition,” he says. “There is still a heavy bias in general against purchasing micro-cap stocks.”

Mr. Marchese adds that the skull-and-crossbones warnings sometimes offer good buying prospects, including his purchase earlier this year of shares in Colorado-based mining company Golden Minerals Co.

“They came out of bankruptcy back in March and insiders were buying the stock,” he says. “When we bought it, it was trading below cash. It’s a situation where the skull-and-crossbones [warning] let me buy it for much less than it was worth.”

Buying such stocks isn’t always easy for retail investors.

“My brother bought some of this and his online brokerage called him twice,” says Mr. Marchese. “Discount brokerage accounts either won’t let you buy some of these stocks or if you do they put the fear of god in you.”

Link to Original Article: http://www.financialpost.com/news-sectors/story.html?id=2204249

Posted in Uncategorized. Tagged with , , , , , , .

By troy
November 16, 2009

No comments