“3 Undiscovered Stocks That Could Explode This Year!” from Penny Stock All-Stars

Where is Gordon Lewis looking for the "next Apple?"

By Travis Johnson, Stock Gumshoe, September 23, 2013

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With a name like “Penny Stock All-Stars“, you’d probably guess that you’re looking at a company that looks for huge gainers in tiny companies — and if you’re a relatively sober and thoughtful investor, you’ll also be pretty sure that this means that even a good newsletter in this category is likely to have a few flameouts for every 100%+ winner… the plan, among these small cap letters, is usually that the losers get cut off before they fall too dramatically (and therefore get nicely expunged from the published portfolio), and the few hopefully very large gainers (100%, 500%, 1,000% if you’re lucky) will more than make up for the losers.

I think I’ve only covered this small Penny Stock All-Starts newsletter once — the editor is Gordon Lewis, and we covered his teaser pitch for a few companies back in 2011. He kept running similar ads for quite a long time, touting the “next Dominos” and the “next Las Vegas Sands” … the pizza one turned out to be small regional pizza player Pizza Inn (PZZI), which is trying to bring a new “Pie Five” concept national and tripled this Spring but then came back and is now still a solid 100% gainer from when they wrote about it, the casino operator was Full House Resorts (FLL), which has also been pretty volatile but is now more or less flat from two years ago. So neither was a disaster, and there were chances to make good gains in both.

Worth a check, then, to see what he’s teasing this time? Why not?

The basic pitch is the same — that he’s looking for “x-factors” that will help you discover the “next Apple” while it’s still a penny stock, including good management, a hot social or economic trend, and takeover potential. And as he did a couple years ago, he’s teasing three “all-stars” in Penny Stock land that he thinks are “undiscovered stocks that could explode this year.”

Shall we jump right to the clues?

“The Next Coca-Cola?

“Last year, Coke sold nearly $48 billion worth of drinks, and raked in nearly $8 billion in profits. Despite the success, consumers are drinking less soda these days. In fact, a major paper reported that “sales of carbonated soft drinks fell 1.2% last year…”

“Consumers are becoming more health conscious, and looking for lower calorie natural drinks. It’s an opportunity for an enterprising beverage manufacturer we’ve uncovered.

“The company’s core products are a line of 24 natural beverages sold throughout the US, Canada, Europe, and Asia. What sets this company apart is every product is made with all-natural ingredients and crafted with care. Products are sold primarily through 14,000 supermarkets and natural food stores. You’ll find their products in Kroger, Costco, Whole Foods Market, Trader Joe’s, and Sprouts just to name a few.

“Company revenue has doubled over the past three years thanks to rising demand… and losses are quickly evaporating. Management expects sales growth to accelerate going forward. Branded products sales are rising. Distribution is expanding and new products are taking off. Best of all, their private label business is gaining traction. It’s a rapid growth story in a huge market!”

This is a stock we’ve thought about before here at Stock Gumshoe — I covered them a while back when I was mentioning some potential stocks in the natural soda space, and our contributor Myron Martin featured them as a favorite idea in one of his columns for the Irregulars a few months ago. This is Reed’s (REED), the natural soda company whose primary products are Reed’s Ginger Ale and Virgil’s Root Beer, both natural sodas that are actually brewed. And I kind of like them, personally.

This is a very, very small company that’s trying to get up to scale by producing private label natural sodas for big chain supermarkets and then, once their foot is in the door, trying to sell their premium Reed’s and Virgil’s products (and a few others, including China Cola and the Harry Potter-inspired Butterscotch Beer). In my experience, I generally see them in Whole Foods and Trader Joe’s and in small local natural stores and coffee shops, but they’re not featured heavily in big supermarkets or in the places where soda consumption is highest (like fast food restaurants).

They are not profitable yet, but they’re pretty close to break-even — the revenue growth and volume growth have been solid, both at or near 20% lately (and close to that level for quite a while), and they’ve been pushing up against production capacity for their core products — in the last quarter they said they would have posted a profit if not for a substantial loss on a private label contract. There’s one analyst covering the stock, but I have no idea how current their opinion is — they list a $2.50 price target and predict profitability next year, but when there’s only one analyst on a stock you have to look at their numbers even more skeptically than you do an average analyst prediction.

REED is not in a real cash crunch, since they have enough to get through another few quarters at this “near break-even” level, and they can probably borrow if they need to, but neither are they super-flush with cash. It seems likely that if reaching capacity on their core products was a limiting factor this past quarter, they’ll probably have to expand to continue the growth trajectory. They’ve raised cash through private placements pretty much every other year since going public in 2006, so presumably they’d continue to do that and sell stock if they need to. That might be an opportunity for the stock to dip a bit, but these have generally not been huge capital raises in the past so it might not have a dramatic impact if it happens. Their founder and CEO does have a large stake in the company, so hopefully that’s a limiting factor on dilutive offerings.

I like the growth, I like the products, they’re positioning themselves well as a healthy soda alternative and, to some extent, as a nutraceutical like POM Wonderful with the ginger angle and their Kombucha product, and they already have good brand recognition and excellent distribution in their core natural foods stores market. The next leg of growth will probably have to come from pushing more volume through the natural foods channel or getting meaningful sales in traditional supermarkets (they’re on track to get this moving, but it’s still early days with just a few supermarket chains). I have not researched the company very fully, but it strikes me that they’re at the point where a substantial investment in capacity and marketing could have a big impact — which makes me wonder whether they’ll be the next natural drink company to get a big non-control investment from (or be acquired by) Coke or Pepsi (like Honest Tea, Odwalla, Fuze, Naked Drinks, Snapple etc.). If they stay independent, there’s a very good chance they’ll be profitable next year and they should continue to have a nice runway for double-digit revenue growth even without any real explosion in marketing spending, but — as we learned in their last quarter — they’re still small enough to be easily derailed by the whims of one big customer or any other glitch in the process.

Hoe about another one?

“The Next Electronic Arts?

“The video game industry has grown into a $65 billion a year global industry. According to one market researcher, the industry’s expected to reach a whopping $86 billion by 2016. That’s a 32% increase in just three years!

“One small player we’ve uncovered is quickly becoming a leading provider of accessories for all major video game platforms, the personal computer, and even the Mac. In addition, it makes accessories for the iPod and other audio devices. The company’s products are sold all over US, Europe, and Canada, through retail giants like Amazon, Best Buy, GameStop, Target, Toys “R” Us, and Wal-Mart.

“With the release of next generation video game consoles imminent, it’s a catalyst for the company products. The arrival of new systems is usually accompanied by consumers purchasing a basket full of new accessories to improve and enhance their gaming experience. This company is in the cat-bird seat to profit from a massive new growth cycle… and it should lead to nothing short of monster gains.”

This one we can’t be 100% certain of, but our “most likely” answer from the Mighty, Mighty Thinkolator is: Mad Catz Interactive (MCZ)

Mad Catz has been around for ages, and I see them mentioned by investors every now and again — this is another very small company, with a market cap now of about $50 million, and they’ve been profitable about half the time over the last decade or so. Their last really good year for profit and growth was back in 2011 when the stock peaked at about $2 (it’s around 85 cents now). The shares have generally bounced around for those ten years between 50 cents and $1.50 a share, so they’ve never been able to create a real compounding growth story — it seems like it’s been pretty short-lived spikes driven by one thing or another that have moved the shares, but it’s impressive that they’ve even been around this long. They essentially sell gaming accessories — headsets, keyboards, special controllers and the like — which is a market where there should be little to no competitive advantage for anyone. The stuff is cheap to make, it’s hard to differentiate it, and the core market of the really rabid gamers who don’t find stock equipment to be acceptable relatively small and probably pretty fickle. So the fact that they still exist is testament to the fact that they must be fairly nimble and they’re probably doing something right.

They appear to have no meaningful insider ownership, though there have been small insider buys in recent years. They have issued new stock over the years, but not a ridiculous amount, and they do also use short-term debt, which would likely make them worried if interest rates spike or they can’t roll over the debt, but, again, it’s not a huge amount — about $10 million. My sense from scanning their financials over the past decade is that they’re working pretty hard to tread water in a competitive industry — maybe they will get a boost from the next generation of gaming consoles, I don’t know … and my gaming credentials are pretty much limited to the occasional bout of Words with Friends or Candy Crush on my phone, so I should probably be asking a teenager about this one before I form an opinion.


“The Next Stericycle?

“As the US population ages, ongoing medical care will continue growing and expanding… and that means the amount of medical waste generated in this country will increase exponentially. We’ve found a company ready to solve this growing problem and make a mint from it too!

“The company we’ve uncovered is a full-service provider of cost-effective medical waste management services. It provides solutions for the proper treatment of hypodermic needles and unused consumer medications. And it serves customers in multiple markets, including home health care, retail clinics, immunizing pharmacies, drug manufacturers, professional offices, hospitality, government, consumers, commercial, industrial, and agricultural.

“The company has several competitive advantages to help it grow and capture market share… but they’re too detailed to address here. The key is the company’s proven business model is highly scalable, and profits are poised to jump as new customers are added. The experienced management team is committed to the growth of the company, and we’re sure to see the stock grow too!”

Again, that’s not really enough clues to be 100% certain — but the Thinkolator points us to a stock I’ve suggested (and then unsuggested) in the past, Sharps Compliance (SMED), a $41 million company that does indeed provide medical waste management services — and they do specifically mention those precise end markets in their filings, including the relatively esoteric “agriculture” market (though it’s a meaningful market, if you think about it — most livestock farmers inject their charges with all kinds of stuff to keep them plump and healthy, and you’ve got to do something with those needles).

Sharps Compliance was a growth darling when I first wrote about them a few years ago, they had gotten into the government buying system and had a couple foundational orders that dramatically boosted their revenues, getting them the attention of Louis Navellier, who teased the stock and brought it to my attention. Unfortunately, it so happens that those orders didn’t recur at the level they were hoping and the growth disappeared almost instantly — they doubled revenues in 2010 from $20 million to about $39 million and posted a nice profit and hope for the future, but then in 2011 the revenues were back down to $19 million and they’ve been on a much more tepid and unprofitable growth path since then.

The company essentially sells the little disposal packs that you see in restrooms or hospitals, places to dispose of needles, and the product comes with the disposal service, so they just get packaged up and mailed back to them for incineration (or whatever). They also have a similar product for disposing of unwanted medications, which is something that’s growing in the public consciousness but is still a much smaller business than sharps disposal. I have not looked at the company in detail since writing them off after their burst of growth failed to be maintained, but my assessment then was that they were a midget among giants (Stericycle and all the big medical distributors, all of whom are either in this business, or could enter it in the blink of an eye), and that their product was not differentiated enough to give them any advantage. I could certainly be wrong, and I haven’t looked to see if they have a bunch of new orders or products, but SMED is our best answer for this “all-star” penny stock in the medical waste business, and you can researchify that one on your own and holler if you find it exciting.

So … any favorites in that bunch? Personally, I’d probably rank them in the order given, and REED seems the one with the best chance of building a real sustainable brand, but they’re all very small and are in competitive businesses … it’s your money, so what do you think? Let us know with a comment below.

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ShowHide Comments (9)
    1. wpg
      Sep 23 2013, 04:16:30 pm

      Reed’s….They came to a B/D I worked at and put on a roadshow….this was pre-IPO. Firm never invested but they seemed like one of the more plausible outfits of many we listened to over the years. We were a very small B/D so everyone from our firm and theirs fit into a regular conference room. At the time they were just selling regionally around the LA area but I did see some of their rootbeer in a local store. Of course we sampled all their products and yes, they were tasty.

      Interesting to see they’ve survived and have DEFINITELY grown. To me, you have to assume they will always be a niche player with the VAST MAJORITY of their drinks sold at specialty type outfits like Whole (Paycheck) Foods and regional healthy-type grocery outfits.

      If you are looking for BOOMING GROWTH, in the form of sales at the traditional grocers, I firmly think you are probably wasting your time. Why?….Sales volume – small compared to regular big name brands and the grocers will not give up substantial display space to these small players. Next, and related to sales volume is price….at a premium price the traditional grocers will realize the “traditional shopper” doesn’t typically pay up for these type products. This is the “Holy Grail” that anyone pushing this stock wants you to always be thinking of when considering the stock….shelf space and volume at traditional grocers.

      Sure, some higher end locations of traditional grocers may have the stuff in the stores but this is a VERY CROWDED SPACE (soft drinks and “specialty” drinks). It’s not cheap to fight for recognition and the marketing costs NEVER go backwards.

      And no, obese people aren’t suddenly going to wake up, change their dietary habits and start drinking “healthy” stuff en mass. Even when they do, price and accessibility matters. Income levels have and effect as well so many just won’t pay up for something with regular sugar VS. corn syrup.

      Maybe they slog along with steady penetration among the healthy food grocers but expansion needs will demand more and more capital (I guess they could have it made on contract/outsourced).

      As for their “candies”…we sampled the little mini-Tootsie-Roll sized ginger candies. I saw them locally and then found the EXACT same candy at a MUCH LOWER PRICE at a large local Asian grocery store. Don’t count on the “candy” to be the growth engine.

      That’s it….guess I’ll head to a healthy grocer this week and walk the aisles to see if they have a presence. The drinks were tasty.

    2. dennis
      Sep 23 2013, 04:20:43 pm

      Code 42,Texas oil Bonanza teased by Keith Kohl has been producing large amounts of oil for a long time. Big oil has been for a long time. Now small oil is starting to make it big.Any idea? It really sounds good except the amount he wants for info $800.00. Thanks

    3. john arguimbau
      Sep 23 2013, 08:27:16 pm


    4. who noze
      Sep 23 2013, 09:44:43 pm

      I think mad catz got their start selling tv. in ca. I kind of remember full ppg color advertising selling electronic equip. thasss a long tyme ago

      Nov 12 2013, 12:48:23 am

      Also looking for any new stock tips on Riding Texas Code 42 Bonanza. Appreciate any suggestions to do more research on. Thanks.

    6. 3984 |
      Travis Johnson, Stock Gumshoe
      Feb 5 2015, 11:11:55 am

      Just ran into exactly this same ad again today — about a year and a half later. SMED had a nice run in the Fall of 2013, MCZ is down substantially, REED is now flat since then — though all have been extremely volatile.

    7. Rob Muschlitz
      Apr 22 2015, 03:27:07 pm

      I have just received an email from a Brian Kent, who says he has “taken over”, this month, the Penny Stock All Stars newsletter. I found his penny stock reasoning reasonable enough to read through his entire pitch. He is offering a subscription for $99 dollars a year, with no refund for satisfaction, in order to discourage “download and then cancel” “tirekickers”.

      He relates the story of buying a penny stock referred by an old friend from his banking days, and it ending up as a zombie stock (some equity “stuck” in your portfolio because you still own it, can’t sell it for loss because it no longer trades). Undeterred by this lesson in how NOT to buy a penny stock, he lays out his strategy, and a winning 600+% trade he made subsequently.

      His penny stock due diligence seems sound. A good penny stock company should :
      1) have a good story : this is how he puts it, “A story stock is simply a stock that has something that makes you sit up and say,, “Yea – that’s cool”. Or, “What a great idea”! It’s a story easy for people to understand… and so simple, a 10-year old kid gets it.”
      2) have financial stability : A) Sales/Revenue : a company must have
      B) Earnings, at least on horizon : “Given a choice between two companies… and one has earnings… that’s the company I’m picking!”
      “Oh and one other word of warning. If the company is losing so much money that it’s hard to see when they will start generating profits… run.”
      C) What’s the debt look like : “Some debt is fine… most businesses operate a bit better with some debt overhead… but you don’t want too much. Being millions in debt without any way to pay back your note-holders is never a good spot to be in.”
      3) Look for a business catalyst(s) : What will spur the company higher ?
      possibilities : new investor/big name fund getting involved; a change in management : “New management teams often hit the “reset” button hard. They look for ways to cut costs, and ramp revenue, and identify new products to sell. Don’t underestimate a management change – even at lower levels.”; the improvement of financials : “For example, when a company finally moves from reporting regular losses to a profit often attracts a new group of investors. The act of making money is often a critical one for any company… don’t underestimate the power!”; the announcement of a dividend; the acquisition of another business; or the successful launch of a new product. “There are thousands of catalysts out there…”

      “Once you see all three things in a penny stock, you need to pounce.”

      he then adds the wise proviso : “Pick up shares for your portfolio… but use restraint… don’t go hog wild. Even billionaires who buy penny stocks don’t mortgage the farm!”

      He then gets to the VERY INTERESTING part of his newsletter promo : We can tell you the penny stocks that billionaires own.

      BUT, before that he makes his partner pitch. He wants to know what penny stocks his subscribers are researching while sharing his portfolio picks. “What are the stocks you’re interested in and why.” I am not sure if this is toadying, brilliance, or a bit of both. “Look, I’m a realist when it comes to the markets… there’s something like 10,000 penny stocks that trade in the markets. If I spent 1 hour researching each and every one, I’d not only NOT sleep, but I’d also not cover every stock out there. Great ideas come from everywhere, and I’m not afraid to say somebody else had a great idea!”

      BTW, I apologize for the long length of this post, and I assure you that I have no interest
      in promoting this man’s newsletter, I just would like to know what fellow investors, particularly Travis, think about this “new management at Penny Stock All Stars”.

      I will finish by just a little (Hopefully!) about the “billionaire angle”.
      Brian says : “We started by looking at 22 of the most active billionaire investors in the market. We then pulled town the data on their portfolios and looked one by one at every single stock they owned. We stripped out the high priced companies, and uncovered a treasure-trove of hot stock picks.””Of the 22 Billionaires we researched, 18 of them owned at least one penny stock… and shockingly, the average penny stock ownership was 6.6 penny stocks!””We looked at each and every one of these penny stocks – 99 individual penny stocks in all. Between these 18 billionaires, they owned 99 different penny stocks. That in and of itself is shocking… but what was crazy was the stocks these billionaires owned. We made three huge observations…First we uncovered 6 different penny stocks that were owned not just by one or two billionaires… but by 3 different titans of the universe. That’s three different thumbs up… by three different billionaires. These six stocks could create a great portfolio all alone. And we name names, and give ticker symbols for all 6 penny stocks.” He mentions that these billionaires are also into some Chinese penny stocks, which, since I have lost my ass on CREG, and recently LAS, now symbol LASLY, I am sore to EVER buying a Chinese stock EVER AGAIN….

      continuing, “Finally, the most shocking observation. I almost fell out of my chair when this data was uncovered… the number one factor that billionaires used when making their investments… DIVIDENDS. No joke. Of the 99 individual stocks we looked at, we uncovered 27 in total that had some type of dividend payout. ”

      closing argument : “If you start adding up all the different special reports and the service you’re going to get information on more than 115 different penny stocks. The 99 stocks in the billionaire report… the one stock in our monopoly report… the three stocks in our next big thing report… plus the 12 stocks we identify in our monthly service. And that doesn’t even count the live trades in the service, and all the great ideas in our published archives! You’ll get over 115 new penny stock ideas, and based on our $99 annual price, you’re paying less than $0.86 cents for each penny stock idea”

      I’m leaning towards purchasing a ‘scription. What do y’all think ?

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