by Jeff Reeves | August 27, 2013 9:29 am
There are a host of horrible ways to lose money out there, including penny stock scams that fleece you out of your money in a hurry or ill-advised investment networks that turn out to be Ponzi schemes.
It goes without saying that criminal investments are a bad idea. But sadly, there are actually a number of legitimate investments that can sometimes burn investors as much as (or even worse than!) the unscrupulous tactics of predatory investors.
Frequently, these ugly investments tend to be in the small-cap arena, trading for a few bucks a share and with a market cap in the hundreds of millions of dollars. They are just big enough to fool you into thinking they have a shot at success … but frequently end in tears.
Here are a few case studies in meltdowns this year, with five of the stupidest investments that traders could have made in the small-cap arena.
YTD Return: -85%
Celsion (CLSN) is a biotech stock that specializes in oncology drugs designed to treat difficult forms of cancer. It’s biggest treatment, ThermoDox, failed in clinical trials, and the stock cratered more than 80% on the news in January.
Shares were trading as high as $9.44 a few weeks beforehand, with the biotech stock boasting a market cap of more than $500 million, but CLSN then was punished to around $1.20 a share where it still currently trades.
This is a case study in the pains of biotech investing. All it takes is one horrible FDA trial to render years of costly research meaningless and upend hopes that the company will ever turn a profit or be wooed by Big Pharma. Right now CLSN is clinging to life, but it continues to bleed cash and has a very rough road ahead.
Investing in Celsion might have seemed like a good idea based on the hopes of curing cancer … but this turned out to be one toxic stock.
YTD Return: -83%
Allied Nevada Gold (ANV) is a gold and silver producer based in (you guessed it) Nevada. Unlike some skeevy penny stocks out there that claim to be speculative miners but actually don’t own a single mine or have the permit to start digging anytime soon, Allied Nevada is the real deal, with its open-pit Hycroft Mine producing a substantive amount of gold and silver last year.
But while legit, Hycroft has its risks. The mine operates under a process called “heap leaching” where ore is mined, crushed and soaked in chemicals that leach ores out of the rock. Then the solution is collected and the gold or silver removed from the liquid. There is a lot of environmental criticism over the process of heap leaching, and it’s not always efficient to simply crush big piles of rock and wait weeks for a chemical solution to draw gold or silver out of the ore.
Furthermore, if you haven’t noticed, gold prices have been in a free-fall — and right at a time when Allied Nevada invested in more heavy machinery to fuel its operations. The unlucky combination has gutted ANV stock in 2013, shaving more than $2.5 billion off the stock’s market capitalization since January.
YTD Return: -77%
What could go wrong with investing in the National Bank of Greece (NBG), you ask? How about everything you could ever expect to go wrong.
Thanks to persistently high unemployment that makes the U.S. look like a picnic — including a new jobless record of 27.6% set in May — anyone banking on a Greece turnaround is delusional. Tourism numbers have ticked up a bit, as have exports, but the vast majority of Greeks remain out of work and with no practical use for banks.
Furthermore, the “shadow economy” of Greece where people do jobs under the table or sell items on the black market to tourists allows them to operate outside the tax code and conventional banking — which means some Greeks actually find a bank account more of a detriment than an opportunity.
NBG has seen revenue crumble and losses skyrocket, though admittedly the first quarter of 2013 marked a rare profit for the company as it looks to complete a bailout-funded recapitalization program. That could be a sign that the worst is over … but it also could be another head-fake in this Greek bank that has brutalized so many investors in 2013.
YTD Return: -73%
Another oncology disaster, Aveo Pharmaceuticals (AVEO) spent seven years developing a kidney cancer drug only to have federal drug regulators decide that the treatment was unsafe for patients and that the study was flawed and confusing.
In short order, AVEO stock went from over $8 per share to a bit more than $2, where it still trades.
The rejection by the FDA was a hard finding to bear, but Aveo is struggling through after scrapping its kidney cancer program and firing more than 60% of its staff.
This is one more case study in the all-or-nothing world of biotechs, where one life-saving treatment would win widespread acclaim for the researchers and big profits for shareholders … but a failure results in a race to zero as the company scrambles to regroup after all of its work has gone nowhere.
YTD Return: -63%
Atlantic Power (AT) owns and operates power generation and infrastructure across the United States and Canada. Its business model sounds safe and low-risk — sell electricity to utilities or industrial customers under long-term contracts, akin to a utility service.
To start the year, Atlantic Power paid a nice dividend — about a 10% yield, since it paid a dime a month in dividends and traded around $12 a share.
But if you thought Atlantic Power was a low-risk utility, think again. The company slashed its dividend from 10 cents a month to 3.33 cents in March, mostly because the company continues to operate in the red, and shares imploded as a result.
Analysts have been getting increasingly bearish as revenue continues to tumble and loss estimates grow ever higher. Atlantic Power has sold part of its business, including its interest in the Path 15 transmission project and a joint venture that includes mega-utility Duke Energy (DUK), but even that influx of cash and assumption of debt might not be enough to turn Atlantic around.
The result is a crash-and-burn akin to a momentum stock running out of gas, not a utility stock hitting a rough patch. Atlantic investors have been hurt big-time in 2013.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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