Small Cap Foolish 8 Buy This Penny Stock!

Penny stock promoters know no bounds in their efforts to foist their wares on gullible investors. Email "newsletters" promoting questionable stocks with half-truths and hype can only succeed if investors don't do their due diligence and make sure they know what they own.

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Zeke Ashton
December 17, 2001

In a recent article, "Straight Talk on Penny Stocks," I warned readers about those penny stocks featured by small-cap email promoters. Unfortunately, if you spend any time on the Web investigating stocks, you are going to end up on the mailing list of any number of these promotion outfits. Typically I just delete them from my in-box, but I saved one this week that may be of instructional value for small-cap investors. The email was sent to me from some entity calling itself Hot Picks.

VOLT INC (NASDAQ: VOLT)

We are very proud that we can share this information with you so that you can make a profit out of it. It is highly advisable to take a position in VOLT Inc. as soon as possible, today before the market closes, or tomorrow.

Note that the email recommends immediate action, urging readers to buy today before the market closes. It should go without saying that you should never buy a stock without having read the most recent 10-K and 10-Q filings with the SEC, and certainly not to buy until you are very comfortable with both the company and the stock price.

As a provider of alternative energy and back-up power systems, VOLT's assets jumped over 2,000% this year to $5.8 Million along with solid net income versus a loss in the previous year. With these type of numbers and news of contractual developments, we anticipate huge volume, rapid analyst coverage, and broker participation.

The company, according to the diligent folks at Hot Picks, is in alternative energy, which is one of those sexy industries. Interestingly enough, Volt Inc. had recently changed its name from Deerbrook Publishing Group Inc., and acquired a wind farm facility in California that, according an SEC filing, is "currently not operating because the company intends to repower the facility with new wind turbines."

The email described the net income as "solid." Well, the filing shows an operating loss of $35,130 for the three months ended June 30, and a loss of $57,605 for the nine months ending the same date. The company shows non-operating income of $262,600 from an extraordinary item called "forgiveness of debt," on the strength of which the company reported diluted earnings per share of $0.00 for the quarter and $0.02 for the nine-month period. While it's technically net income, I wouldn't describe this as "solid."

We hear a stock spit is about to happen. This is one of the most Bullish events that a company can reward their shareholders with.

This is just the peach. First of all, stocks split, not spit (though perhaps there is a market for expectorating equities). As Fools, you know that stock splits have absolutely no effect on the value of the company whatsoever. Note the language, though. There is no guarantee that a stock "spit" will even happen, only that "we hear" that it is about to happen. This becomes even more unbelievable when you check the SEC filings, which reported that on April 23, 2001, the company did a 1-for-100 reverse split. If a stock split is indeed the most bullish thing that can happen, what does a 1-for-100 reverse split say? (Also, my editors want me to point out to you budding writers that "Bullish" should never be capitalized mid-sentence.)

The stock has built a solid base at its current level and will start moving up immediately. We think the stock can easily reach $10.00 in less than a month.

The writer just throws in some technical-sounding mumbo jumbo, and then pulls a price target out of his or her nether regions, along with a ridiculously short time frame for that stock price to materialize. This is just a beauty.

VOLT INC. experience and reputation in the renewable energy business bring a constant stream of new opportunities. VOLT intends to be a major consolidator of PROFITABLE renewable power companies, and has additional opportunities under consideration. Listing on The American Stock Exchange is on pending application.

This just keeps getting better and better. The email now argues for the company's experience and reputation as a source of new opportunities. Remember, this company used to be in publishing, and has only been in the energy business since March 30, 2001. I'm the sure the company intends to be PROFITABLE, but capitalizing the word is no assurance that it will be. 

Hey, wait a minute! Didn't the opening line say that this company trades on the Nasdaq? Well, as far as I can tell, the company isn't listed on a major exchange, and is only traded on the over-the-counter markets. Although I know a couple of advanced investors who will admit to buying an OTC stock once or twice, I wouldn't touch any of them.

The email then goes into a fairly lengthy description of the wind facility, and notes that the company will be engaged in batteries, backup power systems, and thin-film photovoltaic cell technology. I won't make any comments on this section, seeing as the information isn't contained in the SEC filings that I could find.

Disclaimer: We have been paid a sum of $1500.00 as payment for this mailing service. We hold no stocks and have no personal interest in this company.

Folks, here's the bottom line. This stock-promoting company gets $1,500 for sending out this junk, and they don't care what happens to those poor souls who actually are persuaded to buy this stock. The promotion is so poorly written and so full of half-truths masquerading as stock analysis that it's actually entertaining. It's hard to believe that these emails actually succeed in parting people from their hard-earned dollars. If more investors would follow the simple rule of doing some research before blowing money on penny stocks, then we at The Motley Fool wouldn't feel compelled to spend so much time warning our readers about the dangers. I suppose that there must be people who take these emails seriously, or the companies wouldn't waste their time sending them out. Don't you be one of them!

Zeke Ashton, suffice to say, does not own shares of Volt Inc. The Motley Fool is investors writing for investors.