Yesterday, I shopped for my Thanksgiving meal and bought a dozen eggs to make my yummy lemon meringue pie. Not exactly traditional Thanksgiving fare, I grant you, but it's always been a favorite and it's one dessert I can actually make. Nor is this a traditional way to start an article about investing, but I got an email today that reminded me of my meringue, so I thought I'd share it with you.
As an investor who subscribes to all kinds of newsletters and websites (inspiration for articles and potential investments can arise from anywhere), I am often subjected to junk email from stock promoters touting their latest penny stock scam. Rather than delete them immediately, as I know I should, I actually enjoy reading them for the humor they provide. In the daily grind of fighting for truth, justice, and Krispy Kreme (NYSE:KKD) doughnuts, reading penny stock promotional emails is a fun diversion.
A small company sent me a note today excitedly reporting a Business Wire memo that highlighted the company's efforts in fighting anthrax terrorism. Because of it, the stock was set to move. Why? Well, because when Apple (NASDAQ:AAPL) released its iPod, the stock nearly doubled. Yep, technological advances by Apple were akin to technological advances by this little no-name outfit.
That's why I enjoy reading such emails. They provide an endless source of great entertainment. They're like the meringue on my pie: light and easily digestible. With many of the companies priced under $1, it's tempting to think you could make a killing by backing up the truck and buying a ton of shares. Sure, the next Taser (NASDAQ:TASR) or Travelzoo (NASDAQ:TZOO) might be brought to your attention via an email promotion, but I wouldn't be betting my lunch money on it.
Look at the source
OK, you've received an email that makes it seem like the company just might be the Next Big Thing. In a few simple steps, you can decide for yourself whether the company has potential, or whether you'll be wearing pie on your face.
The first thing to do is to look to the source of the news. The email I got referenced a Business Wire article, but like its competitor, PR Newswire -- a subsidiary of United Business Media (NASDAQ:UNEWY) -- Business Wire is a distributor of company press releases. So the firm was highlighting its own press release and making it seem like news. Not a good start.
When I went to Yahoo! (NASDAQ:YHOO) and looked up the symbol, I found the stock was trading at $0.38 a share. Prices this low often signal market abandonment, company sketchiness, and liquidity problems -- not to mention the possibility of penny stock manipulation.
Yahoo! also shows the latest headlines with the quote and, boy, has there been a lot of "news." Over the past month there have been 10 headlines, but every single one of them is a Business Wire news release. Companies that churn out that much news -- with none of it being picked up by a major news outlet -- are operating on press releases alone.
Does the company have a product?
Does the company you're checking out actually have a product to sell? Look at the quarterly income statements provided on Yahoo! to see the latest on how much money it's making. I'd limit myself to companies with at least $50 million in revenues. If you're feeling particularly venturesome, you could go lower, but a real company with an investable business should be able to do more than $10 million in sales. The firm that emailed me sported $18,000 in revenues last quarter -- no, you read that right: 18 thousand dollars.
This I needed to check out further. The latest 10-Q said that the company had a single sale of a single unit, which it in turn had purchased from another company. Not exactly a market clamoring for its products. In fact, when you read through the financial statements of these tiny companies, you often see that they "intend" to have products or they "intend" to have facilities to distribute them. Sure, a company's gotta start somewhere, but I prefer mine to actually be selling products before I invest.
Who's your daddy?
Also check out how the company began its public life. Often, you'll find that these companies began as something radically different. You can read the summaries on Yahoo! for some more entertaining fare. Our anthrax fighter helping to win the war on terrorism started as an Internet marketing firm, acquired another company that had yet to begin operations, and then changed its name. It recently bought some inventory, made a single sale, took out a loan for over $2.7 million, and hopes to raise about that amount from the sale of stock. It's also covered all the bases for those still attracted to the Internet bubble by putting a little "e" at the start of its name and a .com at the end. I'd refrain from investing in any company that can't decide what it wants to be and needs to raise cash from the sale of stock to remain a going concern.
Following these three steps will eliminate from consideration virtually all of the companies hyped in emails. If one happens to survive these tests, it doesn't mean you should run out and buy shares. It only means you're probably dealing with a real company. There's more digging to be done. I don't recommend investing in penny stocks at all, but realize there is a certain allure to it. So in between the Thanksgiving Day parade, the football games, and reruns of my holiday favorite, March of the Wooden Soldiers, I'll be nibbling on some lemon meringue pie and reading through volumes of junk email from stock promoters.
Fool contributor Rich Duprey realizes he has no life. He does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
