You know what it's like when you discover a new hobby? You're really happy and excited, and you anticipate many hours of enjoyment ahead, right? Well, I've got that same sensation, because I've recently discovered an amusing nook in the stock market -- the world of penny stocks. I feel a little bad about this, because penny stocks are so dangerous and destructive to so many people. But if you can temporarily put aside the painful truth that many people have lost huge chunks of their nest eggs in these easily manipulated, extra-risky investments, well . they really can make for some hearty chuckles.

Let's back up
Before I go any further, though, let me explain that a penny stock is generally one trading for less than about $5 per share. You can get the scoop on their dangers in this classic series of articles. And here are some of my related past articles on the topic.

More on Plasticon
So now that you're up to speed, I'll explain what prompted me to write this article. It was an email I received from a reader. He said: "Wrote to you about Plasticon a few months ago. They just filed Q1 numbers, and it looks great. Just wanted to let you know." He then pointed me to the filings.

His email reminded me how people can get overly excited about penny stocks, so I decided to see whether this stock could serve a useful purpose -- perhaps as an eye-opening warning.

By the way, if you've never been excited by penny stocks and you wonder why others are, think of it this way: If a stock is trading for just $0.03 per share, you can buy more than 16,000shares with just $500! For $3,000, you can own 100,000shares! See? Did it work? Did your heart start beating a little faster? But just remember that a $0.03 stock can quickly become a $0.01 stock, or the company can go out of business entirely, and that's not an infrequent occurrence.

I followed the link the reader sent me, and it took me to a website for Pink Sheets stocks. Here's how Jay Perlman described the Pink Sheets back in 2000: "Microcap stocks are usually traded in the Wild West of the financial world -- the over-the-counter bulletin board (OTC BB) and the Pink Sheets." In other words, you won't find Plasticon traded on the New York Stock Exchange.

When I got to the Plasticon information, I decided to look up a recent quote for the stock. I wasn't able to get one. Instead, the site offered this note.

Pink Sheets believes adequate current information must be publicly available during any period that the issuer or affiliates of the issuer are directly or indirectly engaged in promotional activities having the effect of encouraging trading of the issuer's securities in the OTC market. Pink Sheets has observed that such promotional activities are occurring for this security, but that adequate current information may not be available. Consequently, Pink Sheets has removed the quotes from this website until such information is made available by the issuer to the investing community.


The filings
I clicked to access the firm's financial reports. I saw an SEC filing for a 10-K report for the period ending Dec. 31, 2004, that was filed on May 4, 2006. Hmm. There were only two other filings from the 2000s -- the other four were from the late 1990s. Hmm. There doesn't seem to be a lot of financial disclosure going on here. Hmm.

I left the SEC filings and moved to the "Financial Reports" page. There I found a quarterly report for the period ending March 31, 2006, filed on May 24, 2006. Like most companies' quarterly reports, it was "unaudited." Now, I don't worry so much when Procter & Gamble offers unaudited results. But with penny stocks, I give less benefit of the doubt. Here are some things I noticed:

  • The company's cash on its balance sheet was $259,555. That's not shorthand, as it is with many companies' reports, for $259.6 million. It's just what it appears to be: a sum that's very likely less than the value of my modest three-bedroom home!

  • Some might be thrilled to see total current assets up 112%, but that's mainly because accounts receivable ballooned by 700% to more than a million dollars.

  • Quarterly revenues skyrocketed, from $82,370 in 2005 to $1,830,534 in 2006. But total operating expenses topped $10 million, sending net income from a loss of $2.5 million in 2005 to a loss of $9.4 million in 2006.

That should be enough to douse any enthusiasm about this company. Will it become a great success one day? Well, who knows? But it sure doesn't seem to be offering a great track record to which you can entrust your hard-earned dollars. This isn't even a highly unusual penny stock, I'll bet. In fact, I invite my readers to point me to any other penny stocks that they think might hold some interest, for future articles.

Still, small companies can be great
Despite my negativity about penny stocks, it's still true that you can make a lot of money by finding terrific small companies that will become powerful behemoths over time, making you gobs of money along the way. In " How to Find the Greatest Growth," Tim Hanson made a similar point in describing Wal-Mart's (NYSE:WMT) growth. Wal-Mart stock would have turned $5,000 into $83,000 over the past 20 years.

Here's how much a $5,000 investment would have grown to (approximately) over the past 20 years in some big companies that used to be small companies:

  • Apple, $75,000
  • Best Buy, $342,000
  • Amgen, $663,000
  • Valero Energy, $750,000
  • Adobe, $805,000
  • TJX, $2.4 million (since 1988)

The key is to find the most promising small companies -- which are usually not penny stocks. And finding those companies is what David Gardner does regularly for subscribers of our Motley Fool Rule Breakers newsletter service. I invite you to take advantage of a free trial so that you can access all of the past issues and see the long list of recommended stocks, whose average return has long been topping the S&P 500.

SelenaMaranjian's favorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Wal-Mart, which is a Motley Fool Inside Value recommendation.Best Buy is a Motley Fool Stock Advisor pick. 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. The Motley Fool is Fools writing for Fools.