If I were to declare that 99% of all penny stocks are complete and absolute garbage, few would argue the point. Official statistics are hard to come by due to the enormous number of micro-capitalization companies.
In addition, anyone — and I do mean anyone — can start a publicly traded entity. By their default nature, penny stocks are not going to qualify for the upper echelons of the New York Stock Exchange or the Nasdaq. Thus, the requirements are far less intense.
Because of that, penny stocks almost always favor the issuer and rarely the investor. The company gets the cash, and you get a certificate of hopes and dreams. It’s very easy to get sucked into this trap, especially when you’re first starting out. Psychologically, it’s a lot more appealing to nab 11,000 shares of a cheap technology startup versus one measly share of Apple Inc. (NASDAQ:AAPL). In an overwhelming number of cases, penny stocks are trouble — that’s why I warned against them!
There are, however, those that argue in favor of micro-cap companies. One of them is Peter Leeds. For full disclosure, Mr. Leeds is a penny stock guru. But his website referenced interesting research in that the success or failure of newly issued penny stocks is highly dependent on their underlying sectors. Furthermore, initial public offerings of micro-cap companies are less susceptible to failure than higher priced IPOs.
I’m going to take the study with a grain of salt, and so should you. But I’m also going to borrow the general principle. Penny stocks are dangerous not because of their valuation, but the reasons for it. Too often, micro-cap stocks are run by people who don’t care or have businesses that are doomed for failure. However, there are the rare jewels out there that have a solid business and are waiting for that right opportunity.
Here are three extreme penny stocks that are several steps ahead of their over-the-counter peers.
At the risk of hyperbole, Nippon Dragon Resources, Inc. (OTCMKTS:RCCMF) could be the most unique mining company in the world. That’s because RCCMF is also a technology firm.
Its patented and proprietary thermal fragmentation process is a revolutionary approach to traditional mining. Primarily, mining is an expensive ordeal thanks to the enormous amount of earth extractions necessary to get at desired minerals. With thermal fragmentation, there are fewer extractions — and therefore, reduced costs and environmental impact.
The benefits clearly add up. Not only does Nippon Dragon provide a superior mining methodology, but it also gives new life to mines that were previously deemed uneconomical.
The industry has taken notice, and several members have approached RCCMF for joint projects. Such arrangements typically include the use of thermal fragmentation units in exchange for a portion of precious metal extracts.
Aside from these partnerships, RCCMF also has its own gold mining project called “Rocmec 1.” After several years of rehabilitating the property, the extraction potential using thermal fragmentation is very promising.
Ultimately, what really separates good companies from bad are the people running the show. RCCMF really stands out from the competition because of its hard-working and accommodating staff. Most micro-cap companies won’t even pick up the phone — if they even have a working number. But the business development and investors relations team, led by Jean-Yves Therien and John Stella, are happy to answer questions. That provides a level of assurance for possible buyers as opposed to other firms that are ducking inquiries.
The major caveat, of course, is that RCCMF carries the inherent risk of any penny stock. However, for the speculative portion of your portfolio, Nippon Dragon is a smart risk.
I’ll be completely blunt and say that I’m not too hot about everything that Legacy Ventures International Inc (OTCMKTS:LGYV) does. In fact, I wouldn’t bother giving LGYV a passing glance if it were not for one very specific product. After all, this is a company whose market capitalization doesn’t even add up to half a million dollars. By most standards, that doesn’t even get you into micro-cap status.
However, I believe LGYV has an ace up their sleeve: “Boxed Water.”
Personally, I came across this product last year at my local Target Corporation (NYSE:TGT) store. The design is both simple and remarkably effective. Essentially, Boxed Water is water in a milk carton. Nothing new, nothing innovative … and yet, it is exactly that. LGYV plays up the environmental component of its core product. However, Boxed Water is also safer. It has none of the chemicals that can seep into a liquid that’s inside a plastic container. It’s an all-around winner.
Of course, if it was just my opinion, no one would care. But people do care about what Anne Hathaway has to say. She and other Hollywood A-listers have jumped on the opportunity to endorse Boxed Water. Also, popular events such as the Billboard Music Awards have featured the product, along with trendy retail stores like Banana Republic and Lacoste.
For me, it’s not so much that celebrities love it — it’s that celebrities attract people, and that translates into sales for LGYV.
This is not going to be an easy investment. A cursory look at the financials for LGYV will put an end to those lottery-winning fantasies. However, with Boxed Water, Legacy has a chance.
For a speculative bet, that’s all we can ask for.
In many ways, U.S. Lithium Corp (OTCMKTS:LITH) — which holds and is exploring a number of lithium mineral claims — represents the reason why mainstream investors hate penny stocks.
First off, it’s impossible to find any news on the company. At time of writing, Yahoo Finance has zero — zero! — stories on LITH stock, which is a first for me. Also, U.S. Lithium does not have a phone number listed on its website, and a “contact” option that feeds to Zimbabwe, for all I know.
So why bother with it?
Despite very obvious flaws, shares are up 136% this year. Of course, penny stocks have been known to produce incredible numbers if they sneeze in the right direction. But LITH carries a three-month average volume level of nearly 72,000 shares, which isn’t exactly liquid, but it’s also not a graveyard. Also, there was tremendously bullish activity this spring where volume exceeded 4 million shares.
Someone’s eager to get into the lithium game, and they’re not making pensive bets.
That’s not meant to encourage you to do the same. However, I like LITH because its underlying asset could very well be the metal of the future. Lithium powers everything from your laptop to your electric vehicle. It’s reasonable to assume that by the next generation, we won’t be able to do anything or go anywhere without lithium.
There’s a reason why Elon Musk of Tesla Motors Inc (NASDAQ:TSLA) and China are bullish on lithium. And if I have learned anything, it’s to always keep a close eye on Elon Musk and the Chinese.
The primary risk to consider is that a robust lithium market doesn’t necessarily imply success for LITH. However, with so few lithium-based investments available, it gives you a ticket into this wild and crazy game.
As of this writing, Josh Enomoto was long RCCMF and LGYV.