Avoid This Smartphone Stock at All Costs

Penny stocks can either make or break your portfolio. In this weekly series, we'll look at the heartbreakers, the hypesters, and the stocks destined to disappoint, and then close with better alternatives for your portfolio.

Pinched by pennies
More on all those stocks in a minute. First, let's talk about why you want to avoid most penny stocks. Last year at this time, 3,760 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, 1,296 declined in value over the past year -- during a massive rally in which the overall market surged nearly 29%.

It shouldn't surprise you that Pink Sheets 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 hypesters a fee to produce "research" intended to encourage you, the sucker -- I mean investor -- to buy shares.

We don't want you to fall for these shenanigans. To help, we're going to 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 CAPS portfolio.

Let's meet this week's miscreant: Options Media Group.

Pass up this option to buy
"Options Media Group Holdings, Inc. (OPMG), a growing force in mobile applications and marketing and mobile social media, today announced it has closed on its previously announced acquisition of PhoneGuard and entered the mobile and smart phone application market," reads the opening of the pitch.

Clever, isn't it? Using "mobile" three times in the opening sentence, the writer hopes to convince you that Options Media knows the smartphone market. But that doesn't jibe with the company's description of its core business:

The Company provides an email services for on-demand email marketing to create, send and track professional and permission-based email marketing campaigns. Additionally, Options Media provides precision direct marketing solutions including email marketing, SMS/mobile marketing, SMS/keyword marketing, custom lead generation and creative services. 

Um, yeah. Options Media has more in common with email marketing firm Constant Contact (Nasdaq: CTCT  ) than it does smartphone specialists such as Palm.

There's also the disclosure line to consider. "OTCPicks.com is currently being compensated four thousand dollars and two hundred thousand restricted 144 shares by a third party for OPMG advertising and promotional services," it reads. [Emphasis added.]

This isn't research, it's an ad.

Finally, let's talk irony. PhoneGuard is also developing a product that prevents drivers from texting while on the road. Options Media, an email and text message marketer, is acquiring technology that ... blocks text messages. Delicious!

Inside the head-fake
Can you spot any other problems with this pitch? I see two unrelated businesses marrying and then pretending there's virtually no competition to contend with. Here's Options Media CEO Scott Frohman, speaking in a press release copied into OTCPicks' pitch:

Within the acquisition we are announcing today, we are also acquiring one of the most robust technologies available today that prevents texting while driving. A majority of states within the U.S. have already passed legislation making it illegal to text while driving and the vast majority of the remaining states are in various stages of implementing similar restrictions. Considering the very few number of competitors currently addressing this important unmet market need, we believe our very robust software product could become very popular in the marketplace. [Emphasis added.]

Not exactly, sir. Safe Driving Systems and Aegis Mobility are two among many start-ups working on software that limits phone use while driving. And now that Ford Motor (NYSE: F  ) and Toyota (NYSE: TM  ) have come out strongly against texting while driving, more companies are sure to enter the market.

Finally, PhoneGuard's lone advantage versus these anti-virus competitors may be price. According this video interview, the PhoneGuard software costs about $2 to download and install. So, even if there is a massive untapped market for mobile anti-virus software, we're not talking about billions in new revenue for Options Media. Margins may also prove to be surprisingly thin.

Put in starker terms: for as much as we love to talk about the app economy growing up around the iPhone, we've yet to see an iPhone app developer go public and make investors rich. Why should we believe Options Media would be any different, especially when this self-described email marketer appears to have zero software development experience?

Is there a story here?
But I promised you more detail about legitimate enterprises that deal in the sort of smartphone security technology that Options Media is promising. Let's review:

  • Through its Norton subsidiary, Symantec (Nasdaq: SYMC  ) has long dominated the PC anti-virus market. Norton Smartphone Security promises to block rogue text messages and defend against mobile viruses. The software's lone weakness, writes one reviewer, is that there's no support for Research In Motion's widely used BlackBerry OS.
  • McAfee (NYSE: MFE  ) has been offering defense against threats to Windows Mobile for some years now, and recently upgraded its offering to include protection for Android handsets operating on SK Telecom's (NYSE: SKM  ) network in South Korea.

Of these two, I like McAfee if only because the research shows that Google (Nasdaq: GOOG  ) is attracting an increasing number of developers and handset partners to the Android OS. McAfee also trades for about 13 times estimated earnings, Yahoo! Finance reports, about in line with Wall Street projections. Investors buying here are buying growth at a reasonable price.

Now it's your turn to weigh in. How would you invest in waste-to-energy technology? Discuss in the comments box below.

Ford is a Motley Fool Stock Advisor selection. Google is a Motley Fool Rule Breakers recommendation. SK Telecom is a Motley Fool Global Gains pick. Try any of our Foolish newsletters free for 30 days.

Fool contributor Tim Beyers is also a member of the Rule Breakers stock-picking team. He owned shares of Google 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 (5)

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 May 13, 2010, at 11:33 AM, revz100 wrote:

    the other antivirus guys don’t know much about smart phones – OPMG has the NetQin software that has more than 40 mm users world wide – he leaves that part out. – He points to the other’s experience but fail to point out that NetQin is closely alligned with OPMG. Also seems to hate small caps. Does not discuss the relatively strong balance sheet either. We will all see over the coming months. Relative to the anti-texting – I agree there are other players in the market. I don’t think anyone has said anything different. As far as the comments of the company being mainly an email provider, I agree. That is correct – so what – they did a pretty good job in that market and realized it has limited growth potential – now they still have that business – whic by the way id doing well – and now they are expanding the product line significantly. I have seen the Fool be right and I have seem them to be way wrong.

  • Report this Comment On May 13, 2010, at 11:48 AM, revz100 wrote:

    Good interview with phoneguard.

    2.99 per month

    "the PhoneGuard software costs about $2 to download and install."

    More like about $3.00 every month.

    writers mis-leads you to believe its about $2 and

    one time fee.

    Writing lost Creditability with me here !!

    You need to get your facts straight sir!!

  • Report this Comment On April 09, 2011, at 12:24 PM, anthony2d wrote:

    Oh boy, a reseller of software for the USA and Canada and they go Public as a penny stock.. too funny someones being fooled, a email marketing comany that merged with phoneguard and now have a anti texting app.. Well its to funny. But to a real app that will be stopping texts for all platforms, balckberry, iphone, android, symbian and windows phones will be out very shortly......... its the real deal from and the prices is about half the price of the other.. Wake up OPMG/PHONEGUARD...

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