Trust Penny Stock Picks at Your Own Peril

Have you ever wondered what the deal is with those shady-seeming emails and websites touting various penny stocks?

When a friend recently forwarded me an email from StockTamer, I decided to dig in to the mystery.

It turned out to be even worse than I thought.

StockTamer's "About" page spews the same kind of language that most similar sites say:

We spend countless hours researching hundreds of small-cap companies with one goal in mind, finding you the best penny stocks with the largest potential for huge gains, within the OTC Market. StockTamer.com informs you about the break out penny stocks before the OTC market catches on. The StockTamer Report is dedicated to bringing our members new stock small-cap picks ready to make huge gains in the market place.

Sounds like you've got a real research powerhouse working for you, right? Not so much.

The website -- along with Insidebulls.com and Therainingpenny.com -- is owned by The Entourage Group, which describes itself as "a full service E-Marketing / E-Branding & E-PR group." And if you care enough to read the company's disclaimer, you'll find this:

... the Information should not be construed in any manner, shape or form as investment advice, investment recommendations or opinions or viewpoints regarding the Profiled Company or its securities or as a solicitation to offer, purchase or sell the Profiled Company's securities. Stocktamer does not endorse, independently verify or assert the truthfulness, completeness, accuracy or reliability of the Information and conducts no due diligence whatsoever of the Profiled Companies.

And there's more:

We always receive compensation from the third party shareholders in cash and/or compensation in the Securities in connection with preparation and dissemination of the Information, most frequently in the form of Securities in the name of the Profiled Companies. We regularly and routinely sell the Securities before, during and after its dissemination of the Information, most frequently during the dissemination of the Information. You should be acutely aware that we repeatedly sell the Securities while we are engaged (and most often so engaged) in the dissemination of the Information, as well as before and after such dissemination. Many such securities sales occur during the dissemination of the Information often within minutes, hours or days after we first disseminate the Information to the Readers.  

In other words: We will tell you these stocks are fantastic just as we are selling the free shares that we're paid with.

Cashing in by cashing out
While I didn't immediately see details on exactly how much StockTamer is taking in, this business is hardly about pennies.

The Global Equity Report penny-stock site showed that it had been paid as much as $500,000 for a stock "profile" (specifically, for touting Advanced Visual Systems). Six-figure paydays for trumpeting a penny stock doesn't seem unusual either -- the same site had been paid $100,000 or more for hyping numerous other stocks including Lake Victoria Mining, Clenergen, and Wind Works Power.

As if that's not  enough, there are also stock touters paying other stock touters. BlueWave Advisors -- which owns a ridiculous number of penny-stock sites including thehotpennystocks.com, Beacon Equity Research, and thetopinvestor.com -- is listed as having paid thousands to The Global Equity Report to push a handful of stocks. And that's no fluke -- a recent penny-stock email from Penny Stocks Psychic that managed to slip through my junk filter noted that BlueWave paid $12,000 for that site's "advertising and promotion" for the stock it was hyping.

If you think you're the one that's going to get rich in this ugly web then I've got a bridge to sell you.

Sign up for your free newsletter today!
If you've ever wondered why penny stock websites are so eager to give you a free subscription, now you know.

"But," you may still be wondering, "aren't there some good companies hiding out in the morass that is the penny-stock universe?"

I'd be lying if I said that penny stocks never make it into the big leagues. Back in 2000 both Iconix Brand Group (Nasdaq: ICON  ) and Amedisys (Nasdaq: AMED  ) were tiny, uncertain companies with very low-priced shares. Today, both are profitable companies worth north of $1 billion.

But let's just say that the odds aren't in your favor to begin with, and if you try following the "picks" from penny-stock newsletters your prospects are going to be decidedly worse. Why? Because chances are that the stocks that are the most heavily hyped generally have the worst companies backing them.

Here's a look at the five stocks that StockPromoters.com says have been the most hyped over the past week.

Company

Stock Price

Trailing Revenue

Trailing Net Income

Retained Earnings

China Tel Group $0.19 $0.9 million ($67.9 million) ($203.6 million)
Writers' Group Film Corp. $0.04 $0 ($4.8 million) ($5.2 million)
San West $0.02 $2.8 million ($4.4 million) ($5.5 million)
Net Savings Link $0.29 $0 ($0.1 million) ($0.2 million)
Liberty Coal Energy $0.99 $0 ($0.2 million) ($0.2 million)

Source: Capital IQ, a Standard & Poor's company.

Not a single one of these companies has created a penny of value for its shareholders. No wonder they need to paid hypers to push their stocks.

That ain't investing, folks
If you've got a gambling itch and want to scratch it by wagering on penny stocks, fine. I prefer horses or cards when I occasionally feel that pull, but to each his own.

However, don't fool yourself into thinking that you're doing anything but gambling when you're messing around with these stocks.  All you're doing is betting that another investor will be dumb enough to buy the shares from you at a higher price.

Ready to give up the penny-stock delusion and actually start investing? Earlier in the month, I highlighted Raytheon (NYSE: RTN  ) , Willis Group, and AstraZeneca (NYSE: AZN  ) as three stocks on my watchlist. All three appear to "have it all" -- meaning that they're efficient and profitable companies that pay dividends and have a reasonable valuation.

For those looking for potentially higher-growth fare, my fellow Fool Jordan DiPietro recommended three stocks -- including Power-One (Nasdaq: PWER  ) and Bridgepoint Education (NYSE: BPI  ) -- that the broad market may be overlooking. And finally, Ilan Moscovitz highlighted Ingersoll-Rand (NYSE: IR  ) as one of his top 10 Buffett stocks.

So go ahead, slowly back away from the penny stocks and start doing some real investing. To begin, you can keep track of the stocks above by adding them to your watchlist.

Motley Fool Options has recommended a call spread position on Bridgepoint Education. The Fool owns shares of Bridgepoint Education, Power-One, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (26) | Recommend This Article (44)

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 March 31, 2011, at 5:00 PM, mikecart1 wrote:

    Excellent article. I have seen these emails and then I look at the stocks. During the week or so before and after discussion, these stocks will go up 100-200%. Funny how they never tell you when to sell. Stock volume always increases exactly when these emails show up.

  • Report this Comment On March 31, 2011, at 5:06 PM, FOXXY01 wrote:

    i'VE LOST SOME MONEY IN PENNY STOCKS.....BUT, NO MORE.

  • Report this Comment On March 31, 2011, at 5:36 PM, HikerJon wrote:

    Where's the SEC in what's clearly a convoluted pump-and-dump scheme?

  • Report this Comment On March 31, 2011, at 5:47 PM, xetn wrote:

    The old "Pump and Dump" scam. I learned the hard way.

  • Report this Comment On March 31, 2011, at 6:07 PM, MegaEurope wrote:

    While they have infinitely higher ethical standards, TMF Rule Breakers also suggests quite a few companies with low trailing revenue, negative trailing income and negative retained earnings. And in my opinion, they often underemphasize these deficiencies.

  • Report this Comment On March 31, 2011, at 8:30 PM, johndog19 wrote:

    There's nothing convoluted about it. Where's the SEC in what is clearly and transparently a pump and dump scheme?

  • Report this Comment On March 31, 2011, at 9:53 PM, racollard wrote:

    Penny stocks, for the most part, are not meant to be held long term or even over night.

    If you can read charts, understand candles, mcad, rsi, bollinger bands etc etc.. and learn how to play the pump and dumps, you can make money in these rather easily.

    With a day trading account you can also profit by learning how to play the pullback as well.

    Take a look at JAMN's one month chart. Around the time of the Japan quake, it dipped quite a bit and if you had played that dip and continued to hold to this day, you would already be up more than 100% like I am!

    This article reeks of ignorance.

  • Report this Comment On March 31, 2011, at 10:42 PM, tomasovich wrote:

    You have not ""investigated"" far enough. Pumped penny stocks are not for investors but great for traders. There are websites with chatrooms that trade these quite profitably as they rise 100% in a very short period of time, then sell the same short as it falls for another 100%. Trading this way nets many 200% in 2 months or so. They are easy to find, one just subscribes to the pumper websites. In fact so many traders are doing this that often it can be very difficult to find the short shares.

    When you refer to this as gambling the irony is --when the pump is over and the stock is falling the trader selling short has a guarantee as safe as US savings bonds --it is definitely going to fall--such a definite result is one which one can hardly expect for the overall stock market.

  • Report this Comment On March 31, 2011, at 10:49 PM, richinhisgrace wrote:

    There are touts at every rail. How about this?... Where does the average fool find an independent review or rating system for the myriad financial "newsletters" and services in the investing universe? Is there such an omsbudsman on our side?

  • Report this Comment On March 31, 2011, at 11:01 PM, ershler wrote:

    racollard,

    You obviously don't spend much time at TMF or you would realize this isn't a forum for day trading.

    Yes, you can make money in penny stocks, I've had penny stocks quadruple in a short amount of time; unfortunately much has been lost by people who listened to these newsletters.

    HikerJon & johndog19,

    I think the reason the SEC isn't involved is because the companies involved disclose what they are doing.

  • Report this Comment On March 31, 2011, at 11:06 PM, hiopjpojopo wrote:
  • Report this Comment On April 01, 2011, at 1:36 PM, steveelcpo wrote:

    Part of the appeal of penny stocks is the potential gain for a relatively small investment. If you only have $1500-2000 to invest, the hype on 1000 shares of a $1 stock sounds pretty good, especially since that will get you just a few shares of a good company like KO, UNP or JNJ, There used to ba a publication named something like "Low Priced Stock Journal" that focused on good companies under $20/share. This was quite a few years back, but there were many good companies on that one that went on to large price increases.

    Main focus of this article is to know what you're buying and the motivation/bias of those making the recommendation.

  • Report this Comment On April 01, 2011, at 6:40 PM, Jurobi wrote:

    I would like to note that in 1986, stock in a certain company sold for $0.43. If you purchased 1 share of that stock back then and held it, you would have 2880 shares today. That company was Microsoft. That same year, the average prices of a share of Intel was $0.47, and Apple Computing (now Apple Inc.) averaged $3.25 a share.

    I always "depends" and hindsight is better than 20-20.

  • Report this Comment On April 02, 2011, at 10:05 AM, Pharrah wrote:

    VASOMEDICAL (VAS0) is an interesting pennystock ...from 12-month low of .05 to .59 yesterday...a lot of insider accumulation...anyone know anything?

  • Report this Comment On April 02, 2011, at 12:35 PM, BIGSHCLUNK wrote:

    (ESPH) just signed a big deal. I think it looks very promising....

  • Report this Comment On April 02, 2011, at 1:46 PM, markzzzzzz wrote:

    dont forget jackpotpennystocks.com

    and it's sister which name fails my memory as of this posting.

    PUMP AND DUMP IS ALL I CAN SAY ABOUT THIS COMPANY.

    SCUM OF THE EARTH!

  • Report this Comment On April 02, 2011, at 7:34 PM, TMFKopp wrote:

    @Jurobi

    Want to provide a reference for the prices you're citing? Because I think you're mistaken.

    In 1986 MSFT traded in the $30s, INTC in the $20s, and AAPL in the $20s and $30s.

    Note that if you're using Yahoo!Finance for your data, those historical prices are adjusted for splits and dividends. The low prices you note were not what investors were paying for those stocks at the time.

    Matt

  • Report this Comment On April 08, 2011, at 9:59 PM, ag77840 wrote:

    The key is not to look at these BS penny stock sites, but to dig around and see where the smart Venture Capitalists are putting their money. For example, I am holding onto Airline Intelligence Systems (ASYI) because Merus Capital put over $1,000,000 in the company. Their management team is extremely intelligent, with 2 ex-Google executives. The company is a long term hold, for more information on the stock check out their webpage listed below.

    http://www.aisystems.org/

  • Report this Comment On April 09, 2011, at 2:16 AM, finiqui wrote:

    you make money with penny stock

    you play it short but if you want to make money try the long run for PVRE AMPW TADF MFTH

    let me know how you did and good luck

  • Report this Comment On April 11, 2011, at 11:56 AM, wolfman225 wrote:

    I'd happily invest in any tech start-up that's able to develop an automatic screening system (hardware or software) to prevent spammers from posting in forums! Maybe some high IQ techno-geek can write a script that would 1) block all postings that are solely made up of links and 2) immediately cross check the post to the posters' profile's to establish legitimate forums membership?

  • Report this Comment On April 11, 2011, at 2:58 PM, PeyDaFool wrote:

    Hey Matt,

    I wholeheartedly agree with your article, though I would like to point out, I just made a 80%+ return on ACTC this year. Not too bad, if you ask me. I make sure at least 95% or more of my investments are in sane, reputable companies and I usually "gamble" with my 5% in penny stocks.

    My tactic is to set a buy order at a ridiculously low price and immediately set a sell order at a reasonably higher price after purchasing. This way, there's no emotion that placed in the trade. I make "X" percent on the trade and move on. Also, if I lose it all, it's not a major part of my portfolio and I can learn and move on.

    I do consider penny stock stocks to be "gambling," but to me it's no different than going to Vegas and having a little fun. You lose it, no big deal, so long as you're set up to win with your other investments in the long run.

  • Report this Comment On April 13, 2011, at 12:52 AM, techlvr11 wrote:

    Thanks. This is by far one of the better articles. Thankfully I have 3 rules of buying:

    if it is sold only online or on phone, it's most likely not worth it.

    If they claim it's a " secret" or they can't explain how it works, then it is probably a fake, and finally,

    If they promise riches because they want to help you, they are probably lying. I see penny stock stooges claiming how msft was cheap once.

    The fact is that good businesses, big or small, don't have to push their stock on people. Money talks and people sniff out good companies.

    Finally, analyst firms like Goldman are successful because they have real smart people looking at the market while these penny stock guys are bunch of jokers, with no financial education.

  • Report this Comment On April 18, 2011, at 10:30 AM, mjwjd1 wrote:

    If you have an interest in "penny Stocks" try "The Northern Miner" It is a well regarded weekly concerning the world of Mining with an emphsis on Canada and English speaking enterprises. It has been in business since around 1905. It has great maps and a very large handbook of active mines.

  • Report this Comment On August 26, 2012, at 11:01 AM, petehanse wrote:

    You can and will make money with penny stocks, just quit listening to those BS "FREE" Penny Stock Pumped Newsletters.

    Stocks I have discovered on my own are

    ZIPR, ADK, REED, FVE SGRP

    You WILL make money with these ......and you can take that to the BANK!

  • Report this Comment On August 26, 2012, at 1:18 PM, NOTvuffett wrote:

    It is ironic that many of these 'pump and dump' schemes are done by a criminal organisation commonly referred to as the 'mafia'. It is all perfectly legal.

    Caveat emptor.

  • Report this Comment On September 20, 2012, at 12:03 PM, petehanse wrote:

    Yes Virginia there are some "profitable" penny stock sites .......but they are NOT free.

    Trust me you get what you PAY For. The free sites are not really free , because the pumped stocks you receive from those sites will COST you a small fortune.

    I have no vested interest in these companies , but 2 of the best PAID FOR Penny stock sites are Manny Backus' Penny Stock Guru, and Falcon Penny stocks......You will make money with their picks!

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