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 three far better alternatives.

Pinched by pennies
More on these stocks in a minute. First, let's talk about why you want to avoid most penny stocks. Last year at this time, 3,878 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, 1,074 declined in value over the past year -- during a massive rally in which the overall market surged more than 29%.

It shouldn't surprise you that Pink Sheets issues are some of the biggest losers -- or that the companies behind these thinly traded stocks are stock promoters' most frequent clients. They 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 miscreant: Golden Spirit Enterprises.

Some trash just stinks
"Golden Spirit Enterprises Ltd. reports that the Company's CTC Greencycle (Cradle to Cradle) technology known as the Thermal Oxidization Process System (TOPS) and Controlled Oxidization Reduction Environments (CORE) is getting positive feedback from funding efforts made by Companies West Group Inc.," reads the pitch from promoter Shamrockstocks.com.

But this isn't just any promoter. According to the pitch's duck-and-cover disclosure paragraph, Shamrockstocks.com was compensated 500,000 "free trading shares" for its report by extremepicks.com, a barren website save for a page full of sponsored listings. How Golden Spirit got involved with extremepicks.com isn't clear.

My guess is there's a presumption of trading profit at work in this arrangement. A profit so big that it explains this stand-up-and-salute closer:

Mission Statement: Golden Spirit Enterprises Ltd. is an environmentally, socially conscious Company specializing in green technologies which will assist in fighting global warming and the march to help mankind. [Emphasis added.]

God Bless America, and morons.

Inside the head fake
Can you spot the problems with this pitch? Here's what I see:

  • Too much fancy-sounding rhetoric that goes unexplained. My favorite of the offenders: cradle-to-cradle greencycle, whatever the heck that means. Apparently there's a book in which "cradle-to-cradle" refers to crazy ideas such as edible carpet. By contrast, "Thermal Oxidization Process System" sounds loosely related to "thermal oxidation," which, in environmental terms, refers to burning waste. Whoops.
  • An irrefutable emotional appeal. Tying technology to something irrefutably important as global warming increases the appeal of the pitch while promising nothing. It's also a massive head fake given the definition of thermal oxidation.

More troubling is the meat of the pitch, which explains that Golden Spirit is getting "positive feedback" from efforts to secure funding by a related enterprise called Companies West Group (CWG). Shamrockstocks.com goes on to say CWG is interested in green energy, or perhaps alternative fuels. (The pitch doesn't distinguish -- another red flag.) The kicker:

CWG has been promoting the CTC Greencycle "Waste to Energy" technology in Eastern Europe as the premier environmental solution for municipal solid waste disposal. Discussions are in progress with various parties and particulars of a definitive agreement to utilize the CTC Greencycle Technology will be announced in due course. President Jaclyn Cruz states, "The Company is very optimistic with its strategic alliance with Companies West Group Inc."

Optimistic? Outstanding! Sign me up!

Is there a story here?
Or, on second thought, don't.

It's not that I'm uninterested in green energy. As an investor, Google's (Nasdaq: GOOG) cost-cutting solar farm is almost as intriguing to me as its cloud-computing platform. Among the penny stock ranks, I've singled out JA Solar (Nasdaq: JASO) for its bets on silicon ink and ReneSola (NYSE: SOL) because it supplies components to well-capitalized solar cell makers, such as Suntech Power (NYSE: STP).

But I promised you more detail about legitimate enterprises that deal in the sort of waste-to-energy technology that Golden Spirit is promising. Let's review:

  • Through subsidiary Wheelabrator Technologies, Waste Management (NYSE: WM) operates 16 waste-to-energy facilities that convert solid waste to electricity through incineration. All told, the efforts yield enough electricity to power 900,000 homes. Waste Management is also a pick of both our Motley Fool Income Investor and Motley Fool Inside Value services and boasts a generous 3.6% dividend yield.
  • Covanta's (NYSE: CVA) 35 facilities recently surpassed 250 million tons of trash processed. The downside? Most investors already know this stock story; Covanta's shares have substantially beaten the market over the past five years.
  • Clean Energy Fuels (Nasdaq: CLNE) is building a fueling infrastructure for natural gas-powered autos. I love this rebellious idea, but there's risk in that it requires Detroit to convert vehicles to accept natural as a gasoline alternative.

Of these three, I like Waste Management. The core business is virtually unassailable -- we'll never stop creating trash that needs to be picked up and disposed of -- leaving the waste-to-energy plants as a nice kicker. And of course there's the dividend.

Now it's your turn to weigh in. How would you invest in waste-to-energy technology? Discuss in the comments box below.