If you're a long-term investor, you've been handsomely rewarded over the past eight years by hanging onto your high-quality stocks as the bull market roared higher. Though the likes of Johnson & Johnson, Apple, and Facebook aren't going to skyrocket by 2,000% in a year, they provide strong, sustainable business models that are time-tested and allow long-term investors to sleep well at night.
But no matter how well or poorly the stock market is performing, there will always be short-sighted traders looking for a quick buck. These traders tend to lean heavily on their emotions and short-term momentum to drive their buying and selling activity, and in the process they usually overlook very important fundamental factors that have the potential to lead to meaningful long-term gains or losses.
Three surging penny stocks you should avoid at all costs
Most of all, these short-term traders have a real affinity for penny stocks, which are typically defined as having a share price of $5 or less. Penny stocks are usually losing money, and they tend to be quite volatile. With few exceptions (e.g., companies with market caps well above $300 million), we at The Motley Fool generally preach avoiding penny stocks.
Despite what can aptly be described as eye-popping recent returns, the following penny stocks should probably be left locked in the corner, far, far away from your investment portfolio.
Since May began, shares of drug developer MannKind (NASDAQ:MNKD) have soared by 94%. However, the impetus behind the company's recent rally looks to be nothing more than covering by short-sellers. Short-sellers are betting on a stock to lose value, and when it starts moving quickly in the opposite direction, they're forced to buy shares to cover their holdings, thus exacerbating the move upward. As of the latest update, 27% of MannKind's float was being held by short-sellers, which is pretty high.
However, if investors were to really dig into MannKind, they'd find a company that may struggle to survive.
Years ago, MannKind looked as if it had a real winner on its hands with Afrezza, an inhalable type 1 and type 2 diabetes therapy. The inhalable powder was viewed as an appealing option to patients who dislike needles, and it was touted as fast-acting and quick to metabolize compared to standard insulin therapies. In theory, it could work more quickly and reduce the chances of hypoglycemia better than existing medicines. Unfortunately, Afrezza's higher price point (relative to existing therapies) and poor insurer coverage never helped its cause.
The wheels fell off completely when MannKind lost its licensing partner, Sanofi, at the beginning of 2016. A clause allowed Sanofi to walk away if commercializing Afrezza wasn't economically viable, and with nothing more than roughly $2 million in sales each quarter, Sanofi chose to lick its wounds and leave the scene.
Today, MannKind is attempting to market Afrezza itself, after a handful of relaunches. While it does internalize its costs this way, an internal marketing team also means another expense for a company that continues to burn cash. MannKind has done everything under the sun to boost its cash on hand: It's sold stock on multiple occasions, dual-listed on the Tel Aviv Stock Exchange, and sold property. It even has the option of taking out loans from the Mann Group. Nonetheless, its cash pile is shrinking, and its accumulated deficit since inception has grown to $2.75 billion! In short, there aren't any redeeming reasons at this time for investors to be considering MannKind.
Northern Dynasty Minerals Ltd.
Another red-hot penny stock is Northern Dynasty Minerals (NYSEMKT:NAK), a developmental-stage mining company that's seen its share price move higher by 416% over the trailing year. In early February, shares had risen by as much as 950% in less than nine months.
Why such a big move? Precious-metal investors had been counting on the Trump administration to remove a lot of funding from the Environmental Protection Agency and to ease permitting restrictions for Northern Dynasty Minerals' massive Pebble Project in Alaska. In theory, Pebble has enough minerals in the ground to be mined for the next 100 years, if not longer.
But there are two very major catches with this penny stock.
First, there are no guarantees that the Pebble Project is even economically feasible to mine. The company acknowledged that in its first-quarter report:
The Group is in the process of exploring and developing the Pebble Project and has not yet determined whether the Pebble Project contains mineral reserves that are economically recoverable. The Group's continuing operations and the underlying value and recoverability of the amounts shown for the Group's mineral property interests, is entirely dependent upon the existence of economically recoverable mineral reserves; the ability of the Group to obtain financing to complete the exploration and development of the Pebble Project; the Group obtaining the necessary permits to mine; and future profitable production or proceeds from the disposition of the Pebble Project.
If Pebble doesn't have assets that are economically feasible to recover, then Northern Dynasty is essentially worthless. And keep in mind that previous owners of Pebble abandoned it without development, so that is telling of the mine's uncertain future.
The other issue is development costs. Northern Dynasty ended the first quarter with $39.7 million in cash and cash equivalents, but it'll likely take billions of dollars to develop Pebble into a commercially viable operation. Where that money is going to come from is anyone's guess at this point (assuming that it's economically viable). Northern Dynasty Minerals is a penny stock I'd strongly recommend investors avoid.
Medical Marijuana, Inc.
A final penny stock worth keeping your distance from is Medical Marijuana, Inc. (NASDAQOTH:MJNA), a company that (not surprisingly) operates in the medical-cannabis market. Shares of Medical Marijuana, Inc. have jumped by 167% since mid-September, and they were up by nearly 500% at one point over the trailing year.
The impetus behind this penny stock's surging share price is twofold. First, the public's opinion on cannabis is changing, which has marijuana stocks like Medical Marijuana, Inc. heading higher. An all-time high number of people want to see weed legalized nationally in Gallup's and CBS News' latest polls, and near-term estimates for legal weed suggest growth rates could easily exceed 30% annually.
Secondly, Medical Marijuana, Inc. owns nearly 22.7 million shares of AXIM Biotechnologies (NASDAQOTH:AXIM) -- a clinical-stage marijuana stock that's skyrocketed more than 3,900% in the past year. Medical Marijuana's current holdings in AXIM are alone worth more than $250 million.
But here's the issue: Medical Marijuana, Inc. has few viable products of its own, and it's essentially riding the coattails of AXIM. However, AXIM isn't in the best of shape itself. Though it has an intriguing and vast pipeline, it also ended 2016 with a meager $0.7 million in cash on hand. Like MannKind and Northern Dynasty, it doesn't appear to have enough long-term capital to fund its trials, making its current valuation seem somewhat ludicrous. If AXIM's valuation falls, then the unrealized value of Medical Marijuana's investment could plunge, too.
There are also few guarantees that regulations concerning marijuana are going to be lessened in the United States. President Trump hasn't exactly been supportive of recreational weed, and his attorney general, Jeff Sessions, is an ardent opponent of medical and recreational pot. In theory, it wouldn't take much to reverse years of progress with a little federal intervention.
Despite having "marijuana" in its name, Medical Marijuana, Inc. is a penny stock to avoid.