by Dan Burrows | December 12, 2013 12:42 pm
Penny stocks are bad news. You could call them the scratch-off lottery tickets of the stock market, but that would be an insult to lottery tickets.
It’s not that penny stocks never represent legitimate companies that go on to list in the big leagues of a major exchange. It’s just that almost all of them — even top penny stocks — don’t.
By trading over-the-counter, penny stocks have no listing requirements. A lack of Securities and Exchange Commission oversight means that companies trading as penny stocks don’t have to release financial reports. And when they do, the statements aren’t audited.
More worrisome, the low nominal prices and lack of liquidity can make penny stocks a playground for pump-and-dump scammers. When the SEC warns investors that penny stocks are speculative investments in which you could lose everything, it’s being too generous.
And yet folks are interested in penny stocks. The low nominal prices and huge price swings appeal to something primal in people: greed. Penny stocks have the allure of get-rich quick schemes.
But even the top penny stocks — penny stocks that jumped more than 20,000% for the year-to-date — would not have made you a millionaire. Just have a look at three top penny stocks of 2013 to see why:
YTD Performance: 19,900%
52-Week Range: $0.0005 to $0.15
Average Volume (3 months): 24,157
Market Cap: $3.1 million
First on our list of top penny stocks is The Now Corporation (NWPN). NWPN used to be a marketing company, doing business primarily through a website called Itzyourmall.com. Click on the link and you’ll see that the site is gone and the domain is for sale.
That’s because — as of March — NWPN is now in the oil and gas exploration business. Heck, NWPN stock has changed names and businesses at least four times in the last ten years. Penny stocks are weird like that.
More worrisome is that NWPN hasn’t filed a quarterly report since 2008. An S-1 Registration is in the works. Then there’s the fact that the percent gain in the stock masks the reality of the actual profit you could have made off the move.
As with many penny stocks, the NWPN float — or shares available to trade — comes to 5 million, according to company documents. That puts the maximum theoretical pretax profit at at $747,500 (assuming you received every available share for free and sold at the top of 15 cents a share.)
Sure, that would be an amazing gain — except that it’s unattainable for this and many penny stocks. Apart from the facts that you don’t get shares for free and you’re extremely unlikely to sell at the top even in a fair and liquid market, that trade just never could have happened because there is no liquidity in this penny stock.
Most days, NWPN doesn’t trade a single share. You want to buy? Good luck finding a seller at the price you want. Need to cash out? Hah. Good luck finding a buyer. That’s why penny stocks are so dangerous.
YTD Performance: 25,900%
52-Week Range: $0.007 – $7
Average Volume (3 months): 371
Market Cap: $689,000
Next on the list of top penny stocks is Global Senior Enterprises (GSET) — a holding company that wants to own retirement centers in China. But it’s still in the development stage and has no operations. Yes, it’s looking to acquire an operating company — but it hasn’t done so yet. It’s a business plan without a business. No revenue, no profits, and assets of about a thousand bucks at the end of the last quarter are all you get with this penny stock.
It’s also not very reassuring that GSET has changed names and businesses five times in 10 years.
True, this penny stock has gone ballistic on a percent basis, but even if you caught the entire move, it would hardly pay for a private island.
The GSET float — or shares available to trade — comes to 37,373, according to the latest quarterly filing. That puts the maximum theoretical pretax profit at $262,000 (assuming you received every available share for free and sold at the top of $7 a share.)
After tax, that’s about $220,000, which would be a great gain, except that — again — it’s unattainable, because there is no liquidity in this penny stock.
Most importantly, on days when this penny stock did see heavy volume, it tumbled — a classic red flag for the “dump” part of pump-and-dump schemes, which penny stocks are ripe for.
YTD Performance: 29,300%
52-Week Range: $0.0017 – $0.50
Average Volume (3 months): 9,574
Market Cap: $10.6 million
Analytica Bio-Energy Corp. (ABEC) is another development stage business with another long history of name and business changes, the last of which came just a few months ago. And thus, it’s also one of the top penny stocks … that you should avoid.
Uniwell Electronic Corp. acquired a Taiwanese company called Analytica Bioenergy Inc. and changed its name to Analytica Bio-Energy Corp.
As Uniwell, the company distributed electronic components made by manufacturers in Asia. Now, as ABEC, it makes systems to purify industrial waste water. (In case you hadn’t noticed by now, penny stocks are often issued by shell companies that change names and businesses like most people change their underwear.)
At any rate, for the first nine months of the year, revenue came to a little more than $34,000. Naturally, the bottom line looked even worse, with a net loss through three quarters of $133,000. Like the other top penny stocks of 2013, ABEC’s gain of more than 29,000% year-to-date would not have made you a millionaire.
This penny stock was unchanged at $0.002 until the first week of September, when Uniwell Electronic became Analytica Bio-Energy. And even since the change, on most days no shares change hands at all.
Again, there is no liquidity — or even clarity. There are 21 million shares outstanding, but ABEC doesn’t disclose the float of this penny stock. It doesn’t disclose ownership details, either, but it’s got to be closely held — likely with lots of restricted shares — which make for a relatively small float available to outsiders like you and me.
Yes, top penny stocks can put up eye-popping percent gains, but the possibility of grabbing even a part of that upside is minimal, with a good chance you’ll lose it all. And if you do win, the cash you walk away with is hardly going to be life-changing.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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