A few months ago, after writing about a penny stock, I received a fascinating email from a reader familiar with the company. The additional information he offered about the firm is instructive -- it's probably not unlike the kind of scoop you'd dig up on many penny-stock companies, if you took the time to do so.

Let me share some of his comments about ... let's call it Company X. I'll put his words in quotes:

  • He explained that he is from the same town as Company X and was surprised to find that it was, for a while, located in the same industrial park as his company. He noted that it has relocated to a smaller, rented space.
  • He said that the company is not listed in the local phone book. Researching companies can be difficult and complicated, but there are surprisingly simple things all of us can do -- such as looking up a firm in the phone book, and perhaps calling and asking them to send some financial and annual reports. When I had tried calling this firm myself, to ask for such documents, I was told they weren't available -- that's a big red flag.
  • I had failed to find financial results for the company, but the reader noted that "Last November, they forecast '05 sales of $2.7 million to $3.7 million." That is pretty paltry indeed -- and a wide range, to boot.
  • He said that it appeared that the company's chief owned other companies that swap loans with this one, noting that it looked like a company owned by the owner's son was repaid a loan of nearly $800,000 with stock. The son's company seemed to have losses of nearly $3 million on revenue of $200,000. These flags aren't just red; they're fire-engine red.
  • He noted that the CEO's email address was "@alltell.net," "so he doesn't even get email at [the company]."

Finally, he addressed the company's products and claims: "Slab bolsters and bar chairs are not a very important deal, but they list the projects where they are used as if they are being recognized as a world leader or something ... sort of like saying that 'our letter openers are being used at the Pentagon.'"

This reader's email spurred me to revisit the company's website. I wish I could remember what the stock was trading for when I first wrote about it -- because it's now trading for less than a penny per share. Imagine that: A $100 investment would buy you more than 15,000 shares! The stock has been as high as nearly $0.02 per share in the past year and as low as $0.0015. That's more volatile than it may appear. Multiply the numbers by 1,000 and you might see it better: a low of $1.50 versus a high of $20.

These bits of information almost have me in stitches. I want to laugh at the absurdity of it all. Companies like this can be amusing, if you study them in the right mood. Unfortunately, I can't laugh too much, because I know how much money uninformed investors lose on penny stocks.

Another contender
I was inspired to prepare this article by an odd piece of junk mail I recently received, about another penny-stock company. The company is called Net2Auction, and it's apparently [in its own words] "a leading provider of auction drop-off services that allow people to easily sell their items on eBay (NASDAQ:EBAY)."

Reading the brochure, I found myself questioning much of what was said:

  • "The Company is positioning itself to be the fastest growing company in its sector in terms of establishing eBay drop-off locations at a faster rate than any other company in the marketplace." In other words, it's not the fastest-growing such company but is merely aiming to be that. And more worrisome, it's not aiming to be the fastest-growing company in terms of revenues or earnings, but in stores opened. You can open all the stores you want, but if you're not making money on them, you're not necessarily destined for greatness.
  • "[The company] could generate huge profits for investors [that line was all in capital letters] . this stock could be positioned to bring huge returns to investors who invest [in it] now!" The cover of the brochure featured the stock symbol in the largest font size and noted that it "could climb to $4.25 per share bringing huge returns to investors!" Again, all capital letters.

    It also noted: "Rating: 10 out of 10." Where do I begin with all this? Ten out of 10 what? How do they come up with $4.25? (And where is the stock today? If it's at $8.50 per share, the $4.25 would be a 50% drop.) The lawyers, if the company has any, were probably satisfied with all the qualifiers used: "could generate," for example. I myself could win the lottery, but it's not too likely.

The bottom line
The more I examine penny stocks, the more convinced I am that most stocks valued at less than $5 per share carry such low prices for good reasons. These penny stocks tend to be volatile, and they're easy to manipulate -- and lose money on. While I may look at penny stocks solely for their entertainment value, I'd rather invest in firms with established and impressive track records and more transparent finances.

There are plenty of those around. Stephen Simpson recently had good things to say about Goldman Sachs (NYSE:GS), which recently reported revenues up 64%, net earnings up 52%, and a 40% dividend hike. He also waxed bullish on Bear Stearns (NYSE:BSC), which recently posted quarterly revenues up 19% and earnings up 36%. For less fancy fare, check out apparel retailer Citi Trends (NASDAQ:CTRN), which Rick Aristotle Munarriz praised for its robust sales growth of 23%. Steven Mallas has been impressed by Chipotle Mexican Grill (NYSE:CMG), because of its annual sales jump of 33% and its aggressive expansion plans.

If you'd like to receive several promising stock ideas delivered via email each month, learn more about our suite of investment newsletters (which are offered along with some free research reports). You can try them all for free -- and you should at least try one or two, because their performance may surprise you. (I've tried them all, and though I admit I'm not unbiased, I've been quite impressed.) Each regularly offers non-penny-stock recommendations that have the potential for significant growth for your portfolio.

Here's to big profits in your future!

Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, Television Banter, and Card & Board Games. She owns shares of eBay. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. eBay is a Motley Fool Stock Advisor pick. The Motley Fool isFools writing for Fools.