“One Tiny Drug Developer Could Take Down Pfizer”

By Travis Johnson, Stock Gumshoe, February 23, 2009

Taking down Pfizer — hasn’t that already been done? At least, if you think a drop of 60% or so in share price over five years for a “blue chip” company is a “takedown.”

But that’s the promise of a recent issue of the Penny Sleuth free email newsletter — and to find the details about this small drug developer they’d like you to first subscribe to Penny Stock Fortunes (is that newsletter any good? Three folks have reviewed it so far, jump in if you have an opinion).

Penny Stock Fortunes picks, well, penny stocks — something that you can find a dozen different definitions for. In most cases, investors consider penny stocks to be any stocks that are either priced in pennies (or fractions of pennies) or priced under $5 a share, under $100 million or $500 million in market cap, traded over the counter or on the AMEX or on the pink sheets … really, it all depends who you talk to. But the commonality is that these are tiny companies that most people haven’t heard of, and … every once in a blue moon … they turn into big(ger) companies and make people rich. Of course, whenever the moon is more of a whitish color, they tend to take all your cash and turn it into compost.

But that’s neither here nor there — penny stock investing is about gambling, and lots of people like gambling. I even take a flier on one or two of these kinds of companies myself every now and then — they’re often fun to research, it’s nice to fantasize about your possible riches, and, if you’re right, they make you feel smarter than everyone else. Which is why they’re both fun and dangerous.

More dangerous is the standard sales pitch that Greg Guenthner usually makes for his Penny Stock Fortunes newsletter — he calls his system the “CXS Multiplier,” and it’s apparently what is going to get you a yacht and a fancy new car after starting off with just a few hundred bucks.

The way this “system” works is this: You buy a few shares in one penny stock, and watch it multiply by a couple hundred percent. Then you take those profits, and put them into the next penny stock, which will also go up by a ridiculous amount, and then another, and another, and another. Guenthner gives a “chain” of examples in his ad that shows “how much money my system is capable of making.”

“STEP 1: $200 in China Development Group turns into $1,114 – a $914 profit.

“The CXS Risk Avoidance Strategy advises you to remove your original $200. Using money you’ve gained, you have now eliminated the risk of losing the investment you started with. From now on, everything you gain is pure profit. You’re playing with house money.

“STEP 2: $914 in NaviSite Inc. quickly multiplies to $3,234.

“STEP 3: $3,234 is plugged into International Assets Holding Corp., where it becomes $7,688.

“STEP 4: Acorda Therapeutics, a perfect Money-Multiplier, takes your $7,688 and grows it to $56,621.

“STEP 5: Sirna Therapeutics turns your $56,621 into $111,154.

“STEP 6: The $111,154 quickly becomes $548,408 with HandHeld Entertainment Inc.

“STEP 7: And you break a million when Halozyme Therapeutics Inc. grows your $548,408 into $1,235,361.10.”

Now, to be fair, he does preface this by saying that …

“This is going to be an extremely hypothetical example. And although the numbers are actual numbers of real companies, it probably couldn’t happen in real life. But it will show you the power of my system so you can appreciate it and evaluate its usefulness to you. “

But of course, readers who are looking for their next great investment will be looking at that $200 to $1.2 million run … they’re not going to be looking at the “extremely hypothetical” bit, one might guess. Greed gives you a tremendous ability to read selectively, which is part of what this kind of marketing relies on.

And while we’re at it, I’ll share the Gumshoe system — it uses the same basic design.

Step 1: Go to Vegas (or whatever casino is most convenient — they’re everywhere now), pull out a wad of cash, and sit down at the roulette table.
Step 2: Bet a couple hundred bucks on a roulette number.
(If you lose, go to the ATM and repeat step 2 … but we won’t start keeping track of your returns until you pass Step 2 successfully)
Step 3: If you win, bet all those winnings on another roulette number
(if you lose, back to the ATM again)
Step 3: If you win again, bet all those winnings on yet another roulette number.
Step 4-7: Repeat step 3.
Important: Don’t forget to stop playing one roll of the wheel before you lose!

Of course, this isn’t really a fair comparison — because if you’re playing roulette in Las Vegas, you’ll be getting free drinks.

(P.S. The disclaimer is, um, don’t really do any of that, please).

OK, so that’s a bit harsh, it is possible to make money on penny stocks — I don’t know if the odds are any worse or better than they are for roulette, but I do know that the siphoning of your wallet that takes place in a casino is at least all done out in the open — they know their system is rigged so nicely in their favor that they don’t have to cheat you. That’s not always the case with penny stocks, which can sometimes, for all we know, be nothing but shell companies that spit out press releases.

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The argument of a penny stock newsletter will always be that the editor knows how to pick the best companies — and that this can reduce the risk. Intellectually, we know that this is something that should be possible, since penny stocks are essentially unknown to most investors and are far too small to attract institutional money and analysts, so the folks who can understand them well should be able to find undiscovered gems. A good analyst who specializes in reviewing these companies should be able to do pretty well. Whether that “should” and that “possible” are ever realized is, of course, a whole different question.

So what is it that Guenthner is now recommending? Finally we get to the clues that we saw in the Penny Sleuth ad …

“But believe it or not, there’s a much smaller company that can top the numbers of even the biggest drug giant. It’s a penny stock pharma play with a market cap that doesn’t even approach $100 million. We don’t think it’ll stay this way for long, considering the company just signed a commercialization agreement worth more than its entire market capitalization.

“You simply won’t come across a deeply discounted pharma stock such as this very often. The market has managed to overlook quite a gift…”

OK, so that’s nice — a v