The Next Penny Stock Scam

Penny stocks can make or break your portfolio. In this weekly series, we'll look at the heartbreakers, the hypesters, and the stocks destined to disappoint.

Last year at this time, 3,967 stocks listed on U.S. exchanges were trading for $5 or less, and worth between $5 million and $1 billion in market cap, according to Capital IQ. Of those, 1,036 declined in value over the last year -- during a massive rally in which the overall market rose more than 39%.

It shouldn't surprise you that Pink Sheet issues are some of the biggest losers -- or that the companies behind these thinly traded stocks are stock promoters' most frequent clients. They pay these firms a fee to offer "research" intended to encourage you, the sucker -- I mean, investor -- to buy shares.

We don't want to see you fall for these shenanigans. To help, we'll deconstruct one potential scam per week, with help from Motley Fool Hidden Gems co-advisor Seth Jayson and Motley Fool CAPS majordomo John Keeling and their TMFStockSpam account.

Let's meet this week's miscreant: Trans-Pacific Aerospace.

Mmmmmmmm ... Chinese aircraft parts
"Our latest trade idea Trans-Pacific Aerospace Company, Inc. (TPAC) has a strategic focus in the aerospace and defense industry, a fast growing and lucrative market segment," reads a pitch that a (ahem) "third-party" paid OTCPicks.com $4,000 to write.

"TPAC just recently announced the opening of their production facility in China via Godfrey (China) Ltd. of which TPAC is a 25% owner," the pitch continues.

"Additionally, the company has been in negotiations with Aviation Industries of China (AVIC), a company with annual revenues of $21.0 billion and is the major shareholder of the Comac 919 Jumbo Jet. It is expected that Godfrey (China) Ltd will manufacture the most parts of Comac 919 as well, and AVIC is also a manufacturer of regional jets like ARJ-21."

Inside the head fake
Can you spot the problems with this pitch? Here's what I see:

  • The business, while "expected," isn't yet real.
  • AVIC is indeed working on a jumbo jet to challenge Boeing (NYSE: BA  ) , but the company's primary aim is still "to be the world-class turboprop regional aircraft manufacturer," according to its website.
  • Trans-Pacific's primary business had been oil and gas exploration up until March 8, when it officially changed its name from Pinnacle Energy.

Interestingly, Pinnacle Energy wasn't just any oil explorer. It held a 44.5% "working interest" in an oil and gas lease covering 40 acres in Lincoln County, Okla., Capital IQ reports. Forty measly acres. Contrast that with ExxonMobil (NYSE: XOM  ) , which owns land under which you'll find 23.3 oil-equivalent barrels of proven reserves.

Finally, the pitch promises the altogether unicorn-like "sustainable momentum."

The momentum is building and it looks like demand is starting to flow in more everyday. Specifically, the symbol is trending along the upper Bollinger band. Stocks following or "walking" along the upper Bollinger Band provide good signals for those wishing to trade trending or directional stocks – the idea here is to trade in the continuing direction of the stock which is UP.

Because stocks that go up always keep going up, right? Wrong. As of this writing, Trans-Pacific Aerospace was off more than 40% since TMFStockSpam pointed it out last Thursday.

Is there a story here?
What's so tricky about pitches like these is that they don't seem like a head fake till you take a closer look. Yes, AVIC is making a jumbo jet. Yes, Asia-Pacific passenger traffic is booming, creating opportunities for Japan Airlines, China Eastern Airlines (NYSE: CEA  ) , and U.S. carriers with significant operations in the region, including UAL Corp's (Nasdaq: UAUA  ) United and Delta (NYSE: DAL  ) .

Given the wild-eyed claims in the stock spam Seth and John received, I suspect the former Pinnacle Energy possesses neither the products nor the expertise to join these carriers in grabbing a slice of this growing pie.

Now it's your turn to weigh in. How would you invest in the Asian aviation market? Discuss in the comments box below.

Fool contributor Tim Beyers is also a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy wishes the scammers would cram it.


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2010, at 9:59 PM, Mega wrote:

    "How would you invest in the Asian aviation market?"

    Short them. Especially CEA, it is junk and will go bankrupt.

  • Report this Comment On April 29, 2010, at 9:35 AM, DDHv wrote:

    After finding good companies, it is often well to sort them for ones where the price is near the LOWER level of the bollinger bands.

  • Report this Comment On September 07, 2010, at 1:40 PM, jrminvestor wrote:

    This is reverse merger an IPO for a under funded start-up. Risky investment. For investors looking for higher risk/reward scenarios in aerospace, consider an American Publicly traded company setting up manufacturing plants in China. OTC stocks support entrepreneurship & have a shot to double/triple your money short term. Entrepreneurs need capital to start-up or expand. Stock at .25 cents can move up to .75 based a successful capital raise. $1.00 stock can move to $3.00 based on acquiring a key contract. Where else can an investor get those returns? Transpacificaerospace.com TPAC.ob is well positioned in the lucretive aerospace parts industry in China. I bought some stock and recommend it.

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