The Worst Stock Tip Ever

Following a tip to buy First Solar (NYSE: FSLR) or Monsanto (NYSE: MON) a year ago would have left you with slight losses as the market climbed almost 55%.

The stock tip I'm thinking of is worse than that one.

On the bearish side, a tipper who convinced you not to buy Dow Chemical (NYSE: DOW) or AMD (NYSE: AMD) a year ago would have cost you gains of 357% and 287%, respectively.

Even without the benefit of hindsight, the stock tip I'm thinking of is worse. Get ready. I've found the stock tip you can gladly give to your worst enemy.

What makes a good stock tip?
Before I can explain how bad this stock tip is, we need to define the requirements of a good stock tip -- i.e., one that has a reasonable chance of making you money. Here are the bare minimum requirements of a good stock tip:

• The tipper is unbiased.
• The stock is more than just a story.
• The risks are clearly laid out.

Then comes the hard work involved with determining whether the stock is actually a great buy. But as an initial sniff test, the first three criteria are sufficient.

The worst stock tip ever
Since I analyze and write about stocks for a living, I end up on a lot of financial spam lists. I get as many emails about "hot stocks" as the average person gets about "body enhancement."

As a service to you (and much to the chagrin of our IT department), I went through a bunch of these hot tips. Invariably, these emails contain the worst stock tips ever. Touting little-known stocks that trade for pennies, the emails completely violate the rules of a good stock tip.

Primarily, this is because the tipper is almost always conducting a "pump-and-dump" scheme. He buys the stock for his own account, suckers you into buying it as well to pump up the stock price, and then dumps his own holdings (often the same day). Since the stock is so thinly traded, when he exits the stock, the stock price plummets, most likely below where you bought. He makes a killing, you lose your shirt.

Here's an example I received in my email inbox. Let's call this company Shady Pharmaceuticals (I refuse to give the company's actual name any publicity). It is "a generic pharmaceutical manufacturer that produces and markets generic drugs covering all major treatment categories." That's quite a feat when your trailing-12-month revenue totals just $173,000. Yes, you're reading that correctly. Compare that paltry figure to a legitimate generics player like Teva Pharmaceutical's (Nasdaq: TEVA) $13.9 billion in revenue.

Yet "a Wall Street leading independent research firm" had initiated a "buy recommendation" and a price target of $0.41 per share. The stock had closed at $0.10 the day before, so that's quite a profit opportunity they were projecting. Sure enough, the stock had a huge volume surge and quickly reached $0.16 before giving it all back and then some.

A classic pump-and-dump pattern. And since these companies are trash, you can't even hold for the long term, hoping to make up the loss.

In short, don't even think of opening these emails. They contain the worst stocks tips ever. You're headed for a string of computer viruses or losses.

Two better investment candidates
I've given you a warning about terrible companies, but let me leave you with some legitimate companies for further research. Below are two recommendations from our Motley Fool Stock Advisor newsletter service:

Activision, by the way, is on Stock Advisor's Best Buys Now list. You can see the entire list and an analysis of each company with a free 30-day trial subscription. We hope you'll stay and enjoy the service, but you can cancel at any time. Click here to start.

Anand Chokkavelu owns shares of Teva Pharmaceutical. Monsanto is a Motley Fool Inside Value recommendation. First Solar is a Motley Fool Rule Breakers selection. Activision Blizzard and National Oilwell Varco are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. The Fool has a disclosure policy.