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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, 3,435 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, 1,509 declined in value over the past year -- during a massive rally in which the overall market surged nearly 14%.
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. Some of them 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 company: Tootie Pie Company.
Keep this stock on ice
As you might expect, Tootie Pie makes and sells pies that appear on grocery store shelves. By the look of its website, which features a logo bearing the image of a gentle old woman, this is a mild-manned business based in San Antonio, Texas.
So what's the problem? Disclosure. Tootie Pie doesn't do a very good job of it in its press releases. For example, a recent announcement touting a "partnership" with Kraft Foods (NYSE: KFT ) isn't really a partnership at all.
Instead, it's what Kraft spokesperson Joyce Hodel in an interview described as an "in-store trade promotion" that's confined to an unknown number of Texas-area H-E-B grocery locations. In those stores, Tootie Pie and Kraft Cool Whip appear alongside each other and are marketed together. [Editor's note: Calls to H-E-B and Tootie Pie asking for further information weren't returned as of press time.]
If only Tootie Pie had stopped there. On July 8, the same day the press release went live, OTC Market News Source pushed out an email comparing Tootie Pie to Sara Lee (NYSE: SLE ) . "This could be as big as Food GIANT Sara Lee, which is at around the $14.45 area and has issued a dividend the last 240+ quarters to its shareholders," reads the opening of the pitch.
And what did OTC Market News Source get for its trouble? How about $2,500 upfront with $2,500 to follow? Tootie Pie also promised to deliver 17,000 restricted shares as compensation.
Inside the head-fake
Can you spot any other problems with this pitch? I see a grossly unfair comparison. Tootie Pie appears to be a perfectly legitimate business, but it's nowhere near achieving the scale or brand power of Sara Lee. Consider:
- While revenue growth had been soaring in prior years, over the past fiscal year, Tootie Pie's sales inched up less than 1% from the previous year, Capital IQ reports.
- Worse, Tootie Pie has never booked an annual profit or generated cash from operations in any fiscal year during its three-and-a-half year history as a public company.
- Tootie Pie doesn't pay a dividend.
- And finally, Tootie Pie sells ... pies.
Don't get me wrong. I love pie. I'd probably love a Tootie Pie, even more so with Cool Whip. But Kroger's (NYSE: KR ) King Soopers stores, which are local to me, sell Hostess pies and their own "private selection" fruit pies. There's also Marie Callender's, where we buy pies for most holiday occasions. I'm not seeing anything that makes Tootie Pie different enough to be investment-worthy.
Is there a story here?
But I promised you more detail about some alternatives in the processed and packaged goods industry. My picks are going to be simple. Here are three attractively valued, reliable dividend payers that I'd take over Tootie Pie or Sara Lee:
- Recently, PepsiCo (NYSE: PEP ) was my top pick in a roundtable discussion about mega-cap stocks. What I said then still applies. Combine tasty brands such as Mountain Dew and Mug Root Beer with a healthy 3% dividend yield and you've got a tasty elixir for investors.
- Unilever (NYSE: UL ) is one of the world's largest consumer products companies, and yielding 3.2%, has been an even more generous dividend payer than either PepsiCo or rival Procter & Gamble (NYSE: PG ) . The company is also a large supplier of food to emerging markets.
- General Mills (NYSE: GIS ) is probably best known for its Chex cereals, which come in a variety of gluten-free flavors. My wife and I love that, as parents of a food-allergic child who also suffers from Celiac Disease. Investors may find the stock's 3.2% dividend yield equally lovable.
Of these three, I like General Mills best for its balance of healthy products and outsized dividend. I'm also encouraged by history; General Mills has raised its payout by nearly 10% a year over the last five.
Now it's your turn to weigh in. How would you invest in the processed and packaged foods industry? Discuss in the comments box below.
Unilever is a Motley Fool Global Gains recommendation. PepsiCo, Procter & Gamble, and Unilever are Motley Fool Income Investor picks. Motley Fool Options has recommended a position in PepsiCo. Try any of our Foolish newsletters free for 30 days.