I usually write about teaser stocks from legitimate investment newsletter publishers — folks like the Motley Fool, Stansbery & Associates, Agora, KCI, Investorplace, or Forbes, most of the big names that might be familiar to you.
Many of the ads I see are over the top, filled with hype, misleading, or even laughable, but in most cases the newsletters and the editors who came up with the ideas and wrote the analysis did so — at least in the beginning — for legitimate and defensible investment reasons, and really do intend to come up with ideas that will make you money. They can make a hell of a lot of money when they get new subscribers and keep them happy, too, so their incentives are usually in the right place — even if they don’t necessarily (and in most cases, no one could) provide the performance that their teaser ads “promise.”
There’s a whole underbelly beneath this part of the financial publishing world, however, and, if the questions I get from readers are any indication, many folks are either so skeptical about the “legit” newsletters that they don’t see the distinction or simply don’t know that they’re different — and this underbelly is made up of “promoters.”
Stock promoters sound a lot like newsletter promoters — but instead of trying to get you to subscribe to a newsletter (sometimes by suggesting or teasing a particular stock or investment idea), they’re trying to simply get you to buy a stock.
Why? Because they’re paid to do so, and because the microcap stocks they promote are extremely easy to move if just a few thousand new dollars come into play — either they own shares that they are trying to drive up so they can sell them, or they are paid to “promote” a stock by either another shareholder or the company itself.
The slang for this is what we so often hear referred to as a “pump and dump” — with the stock promotion emails taking the place of the old “boiler room” operations (though there are still plenty of those, too). In many cases, it will be a large shadowy investor who buys up a large portion of a teensy and ignored company’s stock and then orchestrates a public relations campaign of promotions by a variety of stock promoter companies, and when those companies succeed in raising the profile and the stock price, the big investor can sell out his shares at a profit. Sometimes the investor who owns these shares is unrelated to the company, just using a name and a sell-able story to pump and dump shares, and sometimes the investor, for all intents and purposes, is the company.
There are other ways this can work, too — sometimes it’s a little bit more innocent, and a little penny stock will run a promotion campaign to help it raise its own stock price so that they can increase the value of the company and then sell new shares to raise money. That’s not a great argument for investing in a stock, of course, but it’s not so different conceptually from Wall Street tradition, which will have public companies doing “road shows” to generate interest before an IPO or a secondary offering — that is, after all, the role of a broker, to sell a company to investors.
So today I thought I’d give you just a couple simple things to think about when you see these kinds of stock promotions — and some flags to look for if you’re not sure if it’s really a promo piece. I’ll start by looking at one example that was sent in recently.
I should also provide a bit of a reminder that although there are plenty of folks who try to game these promotions (ride the stock up, short it and ride it back down), doing so is rarely as easy as you’d think. When you see the spikes that stock promotions cause, it is extremely tempting to think that you’re savvy enough to ride on their coattails and make a mint — if you’re tempted to do this, be really, really, really careful.
All promoted stocks are microcaps, often with a market cap of just a couple million dollars, and many of them are extremely illiquid or impossible to short. Unless you’re the promoter you can’t know for sure exactly when the promotion will stop (and therefore, when to sell), and you’re almost definitely not on all the email lists that are being used in the promotion. Heck, even if you are the promoter, there’s no guarantee ahead of time about exactly how effective it might be or how much you might be able to drive the share price.
So even if you don’t think staying away from these kinds of speculations should be a matter of principle, for almost all investors it should be a matter of self preservation (or wealth preservation).
And yes, to be clear, some stocks that get promoted by these kinds of penny stock hucksters are legitimate (albeit tiny) companies that have nothing to do with the promotion or promoters — I’d still stay away from them. The universe of investing is large enough that you don’t have to split hairs — there’s nothing wrong with avoiding stocks just because they smell a little funny, this is one of those areas where profiling and stereotyping is justified: if a stock’s being promoted, you don’t lose anything by assuming it’s junk and ignoring it.
I should also note that penny stock promoters are among the heaviest financial advertisers on the web, so to some extent I’m enabling their work as a publisher and benefiting from their free-spending ways — I’m sure that there are probably ads from these kinds of groups on this website and in my email newsletter from time to time, maybe even right this minute. As with all other advertisers who grace our space, that doesn’t mean that their product or service is endorsed by Stock Gumshoe or by yours truly.
So after all that, how about that example?
The sample I’m looking at now came in from an email newsletter that calls itself AwesomePennyStocks, one of probably thousands of similar penny stock promoters who offer a “newsletter” that emails “free picks” to anyone (“for a limited time” of course), and which somehow endeavors to include logos of legitimate financial new sources on its website in hopes that they’ll suck up some of that aura (“Penny Stocks in the media” on their home page, for example, lists logos of Yahoo Finance, MarketWatch, Scottrade, etc. with no links or further explanation).
Many promoters run their promotions under several different names and even invent fictional people to sign the letters (as with “Jason Kelly” who purports to run the Day Trading Robot and “Michael Cohen” who pitches for DoublingStocks), and many of them also try to make their picks look and sound like recommendations by their analysts that are shared in a free email newsletter out of the goodness of their hearts. I don’t happen to know if this one is part of a larger network of letters or not, but after a while the ads all start to sound the same.
This particular ad is a promotion backing a stock called CleanPower (CPOW on the pink sheets), which apparently (I didn’t do much due diligence) is an actual company that owns a canola seed crushing plant and a biofuel refinery in Saskatchewan. They appear to have been losing money for years, and from a glance at their recent 10-Q it seems like they’ll continually need to borrow money from officers and sell more stock to remain a going concern. From what I saw in a very quick look it would be really, really hard to justify buying this stock for any fundamental reason — but of course, that’s true of every single similarly promoted stock I’ve seen. Why else would you need to pay a promoter to get investors interested?
And though I don’t have any reason to pick on this particular promoter, since the ad seems no worse or better than any others, one of the reasons that I picked this one from the sea of promotions is that they also use a second “source”, with a conveniently familiar name, to buttress their “analysis.” Here’s a quote from the promotion:
“So just how much of a bargain is CleanPower at now?
“Well, don’t just take our word for it… Let the market experts guide you as well.
Just today we saw this fantastic news, and we couldn’t agree more with it!
“Goldman just gave CPOW a 2$ Target!
‘Based upon the recent Chinese deal, and expected further near-term industrial and consumer business development, we believe that Clean Power Concepts’ shares are very attractive at current levels.
‘In fact, we believe that the stock is worth $1.00 today based on the Chinese deal alone, which serves as tremendous validation.
‘As its brand awareness grows, meaningful revenue is generated, and new channels are opened, the stock should reach $2.00 in the next six months.
‘Thus, we rate Clean Power Concepts a Speculative Buy with a six-month target of $2.00.’
“Seems like we were right on the money with our estimates, and Goldman smallcap research confirms it. ”
And yes, the “Goldman gives CPOW 2$ target!” was the subject line of the email that these promoters sent out. Which would make most investors assume, of course, that they’re talking about Goldman Sachs, the globe’s preeminent investment bankers.
They’re not, of course — this particular Goldman is Rob Goldman, who runs Goldman Small Cap Research, apparently out of a UPS Store PO Box in Pikesville, MD. Not that there’s anything wrong with that, I’m a PO Box guy myself, but it’s probably not what folks are expecting when they see “Goldman gives CPOW $2 Target!” in their subject line.
Goldman Small Cap Research did publish an analyst report on CPOW and did give it a $2 price target, but this was a sponsored research report. The analyst’s disclaimer claims that the information came from the company and that they were paid in advance to ensure independence, and that the analysis represents Robert Goldman’s opinion, but as I read it he was also paid $15,000 (for a three month research subscription) by a third party to publish this analysis. He doesn’t say who this “third party” is, but my assumption would always be that it’s the same entity that’s the “third party” paying AwesomePennyStocks to publicize the stock. I don’t know if CPOW has anything to do with the promotion of their stock or not, but apparently they at least didn’t directly pay for the analysis or the promo campaign.
So that’s one thing to always look for — many penny stock promoters quote analysts and analyst reports to make their promotion look like a real recommendation that’s backed by fundamental analysis. Usually all it takes is a cursory look at the analyst, or the analyst’s disclaimer, to verify that the company or some third party paid for this analysis to be done… and this won’t be the only time that the analyst or research firm happens to have a name that coincidentally sounds a little bit familiar (though, to be fair, I assume that Rob Goldman is really his name, and we shouldn’t object to him using it professionally).
The second thing to do with a stock promotion, and arguably the most important thing (unless I can convince you to just delete them unread), is to always, always, always start at the bottom — often, the very last line. The bottom of a stock promotion, the part they hope you won’t actually read, is almost always the small print disclaimer. And while much of what these companies do seems to be perfectly legal, it’s only legal if they tell you they’re doing it — so while the last line of the actual intended content of the email is …
“We could see CPOW almost triple immediately!”
… the last paragraph of the disclaimer probably better tells the story:
“AwesomePennyStocks.com received $5,000 CAD from a third party for publication of this information. This compensation may constitute a conflict of interest as to AwesomePennyStocks.com’s ability to remain objective in our communication regarding the profiled company.”
Gee, you think?
So go ahead and keep reading these penny stock promotions if you like, and keep sending ’em along to me if you find them intriguing — but keep in mind this bakers half dozen things before you buy any stock that you hear about this way:
1. Not sure if it’s a promo? The stock ticker will probably be mentioned almost immediately in the ad, even before the name of the company, and will likely be in the subject line. That’s no coincidence, they want you to buy the ticker without thinking about the stock. Because …
2. The company is almost certainly junk, and you wouldn’t buy it if it hadn’t popped up in your email. Really, you wouldn’t.
3. The stock will probably go back down as soon as the promotion is done, likely coinciding with whoever sponsored the promotion selling off a lot of stock. CPOW, in this example, peaked at about 50 cents right around December 30, which is the day I saw the promo — it was at eight cents and almost never traded a few weeks earlier, and is back down below 20 cents now.
4. The analyst or news source they’re quoting is almost always going to be a “sponsored” analyst report, probably sponsored by the same folks who paid to promote the stock, or a press release issued by the company.
5. You’re not their main customer, even if you signed up for their free (or worse, paid) penny stock newsletter. They’re not being paid to make money for investors like you — they’re either being paid to tell you about a stock, or they’re trying to manipulate you so they can profit from trading the stock. Somewhere in their disclaimer they’ll probably tell you which. Which leads us to …
6. When you get a penny stock promotion, even if it makes your palms itchy and you feel like you’re comin’ into some munny, read the disclaimer first. Seeing in black and white that someone paid $5,000 to send you and a few thousand of your closest friends this email tends to cool the ardor.
And though I noted at the top that I separate “real” investment newsletters from these kinds of stock promoters, I’ll add two special codicils to this:
A. There are some newsletter publishers and editors who produce what seems like a perfectly legit newsletter but who also effectively rent out their name and their mailing list to promote stocks. I gave Untapped Wealth a hard time for doing just this a few years ago, for example (I don’t know if they still do this or not).
Firms that do this have to try a bit harder to keep their reputation intact and will be a little bit clearer in their disclaimers, usually, when disclosing that they’ve been paid to report on a particular stock and are being paid to do so. I wouldn’t just ignore a stock in that case, I’d go so far as to cancel my subscription to a newsletter that did this to me — the investment newsletter world is almost ridiculously lucrative if you’re decent at your job and your publisher is at least a pretty good marketer, no need to patronize the publishers who push the envelope in this way. If you put yourself out there as a stock picker and legitimate analyst but also rent out your name as an endorser of stocks, whatever reputation you might have had disappears, in my opinion.
And B. There are some newsletter publishers that don’t seem to have or publicize very clear rules about conflicts of interest or trading rules — I’ve occasionally noted in the past when I’ve seen a disclaimer in an otherwise legit-looking newsletter ad that says that the editor and other employees may own the stocks covered, and may trade in them at any time. I don’t know if this is just a blanket statement to cover themselves, but if any publisher lets an editor recommend a stock that he owns to ten thousand subscribers and then sell it when it necessarily pops the next day they’re certainly doing you a disservice — and they’re also giving their editors incentive to recommend microcap stocks and profit from that movement.
If you don’t know what the trading rules or disclosure requirements of your newsletters are, it might be worth checking — for what it’s worth, my rule is this: I disclose whenever I have any direct interest in any stock I cover (ie, long or short the stock or options) or when I have an open limit order for anything I’m writing about (which is very rare), and I prohibit myself from trading in any stock that I write about for at least three trading days.
The rules run the gamut, some newsletter writers own every stock they write about and are basically just analyzing their own portfolio for you, some will not ever buy any stock they write about, others have variations on those rules — but there should at least be some clear rule that prevents them from buying a stock, recommending it to you, then selling it the next day.
If you’re curious, by the way, about what stocks are being promoted, or wondering whether a stock is being promoted by more than one promoter, I sometimes check up on StockPromoters.com, which keeps an active database of promotions that they’re aware of (including, when they know, the compensation paid for the promotion). A look at their records for CPOW, for example, will note a dozen or so “newsletters” like AwesomePennyStocks who promoted this stock in late December, and some larger entities (like MonsterStox.com and TitanStocks.com, which are owned by the same publisher) who were paid much larger sums (reportedly $100,000 each, in this case) for ad campaigns promoting CPOW around the same time. No surprise, then, that the stock started trading millions of shares and the price spiked.
So there you have it — I almost never write about stock promoters and their ad campaigns, since I have no interest in buying the stocks or giving them even more attention than they already enjoy, but I get so many questions about them that I feel the need to respond once or twice a year.
Teaser stocks from the legitimate newsletters from established publishers that I usually write about may be (and often are) overhyped, overpriced, inappropriate or stale … but at least there’s almost always an honest opinion behind them, there’s usually a real and reasonably-sized company being picked, and sometimes we even find something worth our investment dollars. I can’t say the same thing about the “hot tips” from stock promoters.