I’ve got several teaser pitches percolating right now, but this one quickly rose to the top after a couple readers sent it to me this morning.
Why? Not because I’m all that excited about the stock (it shouldn’t be a public company, frankly), but because the promises of absurd returns are so specific and over-the-top that I felt compelled to look into the reasoning. Turning $1,000 into $25,400 in six to twelve months is absurd, even if you are talking about a penny stock that catches lightning in a bottle and creates something (like a gold mine or a cancer cure) out of nothing….
… usually, when newsletters talk about huge profits they either leave out the amount you have to invest, or they leave out the time period for that investment. But Alex Koyfman’s ad gave us the whole formula: Turn $1,000 into $25,400 in 6-12 months. That’s crazy enough to examine… and perhaps dangerous enough, for novice investors who might buy the hype without question, that I feel like we should offer some critique and perspective.
That would be a 2,440% return, by the way, for those who prefer percentages — or, if it happens in six months, an annualized 4,880% return. I’ve had only a few 1,000% returns that I can remember in 20 or so years of investing (and that’s the kind of thing you’re likely to remember), one took a decade or so (Google) and others were mostly luck-driven options speculations (Baidu during the first China mania, and an ad tech company that was bought by Microsoft many years ago come to mind).
There are, to be fair, 1,000% gainers over a relatively short time period among penny stocks, and they probably happen with some regularity (often because of stock promoters, but sometimes because businesses are real and grow)… but there are also 99% losses with some regularity (and in case you’re counting, recovering from a 99% loss requires a 9,900% gain). If you want to shoot for gains like that, probably best to keep your exposure small (in the “genuinely can afford to lose it all” category) and spread the money around to a bunch of different teensies to try to improve your odds of a big success that makes up for the inevitable flops.
So with that math out of the way, what’s the “secret” stock being teased? The ad is for Alex Koyfman’s Penny Stock Millionaire, which sells for $499/year (from Angel Publishing), and this is how he sums it up on the order form:
“This is one of the most guaranteed and lucrative tech plays out there today: under-sea drones.
“This company has already signed major contracts with U.S., Canadian, and other national defense contractors to supply the world’s most precise underwater sensors.
“But that’s just the start… Just a short time ago, it acquired a robotics company with the goal of taking over the emerging underwater drone industry.
“It stands to become the fastest-growing sub-sector of the defense industry since unmanned aircraft, and this company, still tiny, is competing with and beating some of the biggest giants in the game.
“As its technology gains more and more clients around the world, investors holding shares today could see gains of between 1,400% and 2,100%.
“And I’m not just predicting anymore… It’s already starting to happen.”
The “catch your attention with fear” bit at the beginning is focused on mini-submarines that are being used by Iran and by drug smugglers, and on the next wave of mines that could be used by extremists or enemies to block key shipping routes….
… and then goes on to explain the opportunity, which is based on the fact that current underwater threats are hard to see. Here’s some of the ad:
“What Does Any of This Have to Do With Making You Over $25,000 in the Next 6 to 12 Months?
“The key is this: These threats are incredibly difficult to see.
“Because they all lurk in a region of the Earth that we know surprisingly little about: the ocean.
“It’s actually quite astounding just how little of the Earth’s seas are explored compared with everything else.
“Most people don’t realize that we know more about the deep expanses of space (even galaxies and planets hundreds of thousands of light-years away) than we do our own oceans….
“Traditionally, we’ve only had radar, sonar, and infrared systems, which churn out choppy images….
“Because of this sheer lack of visibility, military and commercial vessels can’t tell the difference between a narco-sub and a whale or a Ghadir and a piece of wreckage.
“Most of the time, they can’t detect underwater IED mines at all.Are you getting our free Daily Update
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“Who Needs to See Underwater the Most?
“And How Much Are They Willing to Pay for the Best Technology?
“This is the question that barely any investors and traders out there are asking, and yet it’s the most pressing issue for two of the world’s biggest, most powerful industries…
“Military and oil.”
The comparison he gives is then to drones, with the implication that the skies full of unmanned drones for surveillance, military, or other applications is the precursor to an ocean full of drones (AUVs, or autonomous underwater vehicles)…. and that getting in on this young company would be like investing in early drone technology in the 1990s.
More from the ad:
“In a moment, I’m going to tell you about a young company that has been making BIG moves.
“This company has already developed underwater technology that produces visuals so shockingly clear and crisp that the two industries listed above are in a bidding war to put it to use first.
“That’s not all, though.
“This company has also just combined its current technology with something that is going to revolutionize underwater exploration and cause shares to soar for projected gains of 2,140% to 2,900% in just the next 12 months.
“This means anyone investing in shares now is likely going to see a massive ROI in a ridiculously short amount of time.
“Oh, and the best part?
“This company is the ONLY one doing this….
“It’s still so small, so overlooked by the investment community, that’s it’s actually not much larger than many tech startups.”
Koyfman also includes a bunch of images in the ad, comparing the conventional sonar images to the much sharper images (7X better definition) provided by his secret company’s technology, which is apparently called synthetic aperture sonar.
He also says that a big part of his excitement is due to the fact that this company just bought some robotics technology… here’s that bit of the tease:
“The Most Exciting Part: Who This Company Just Bought
“And the major endorsements and contracts it’s already attained
“You see, just a few months back, this company acquired one of the leading underwater robotics technology companies in the world, along with all its related intellectual property rights and physical assets.
“In other words — this world leader in underwater sensors now has a platform for turning those sensors into the world’s smartest, most sensitive, most lucrative underwater drones.
“Just like that, the underwater drone market has been cornered… and EVERYBODY wants a piece.
“The company has already been endorsed by the Canadian and U.S. navies, and it’s already exporting its deep-diving underwater vehicles to eight countries.
“Even more to the point:
“It’s just been awarded a $1.5 million order from a major defense contractor thanks to its patented synthetic aperture sonar that allows for unprecedented accuracy.
“That order, by the way, is equivalent to 10% of the company’s current market capitalization.”
Yes, you did the math right in your head just now — that means this is a company with a market capitalization of $15 million. It often trades less than $10,000 worth of shares in a day, which means that if ONE of you decided to buy a $5,000 position you would be likely to significantly change the share price. That’s why I’m publishing this after the close, though you can see that the stock has already popped up just because of the number of people who either subscribed to Koyfman’s newsletter or gumshoe’d it on their own — call me paternalistic, but I’d rather write about a stock like this when everyone can take their time to read about it and think before letting their itchy trigger finger scoot over to the “buy” button.
But I’ve put the cart before the horse again, no? I should tell you the answer first: This is the teensy tiny Canadian firm Kraken Sonar (PNG on the Venture exchange in Canada, KRKNF OTC/Grey Sheets in the US — US ticker has even less volume and probably terrible pricing, be careful).
The company they bought recently was Marine Robotics, which was announced back in November. I don’t know what they paid for the company, they haven’t reported their December quarter yet so it hasn’t hit their financials, and I haven’t read their SEDAR filings to see if there’s more detail available (that’s the Canadian equivalent of SEC filings).
And yes, they are a sonar company — they’ve been primarily developing and trying to sell their sensor and processing technology that can be used in a variety of AUVs or towed arrays and that has, they say, much more robust performance (higher frequency, much higher resolution images, etc.)
This is not a business with a lot of publicly traded “pure play” companies for comparison, but neither is it a business where Kraken is the only player — both underwater robotics and sonar/underwater imaging are markets addressed by major defense and oil service/engineering companies, with the overwhelming amount of focus in recent years being on the oil and gas market (monitoring and repairing subsea systems, mapping the ocean floor detail).
For the few large companies in the space any new defense/AUV business is growing far too slowly, if its growing at all, to make a dent in the utter collapse of their oil and gas business thanks to falling oil prices (the easiest example is Oceaneering (OII), which is down 60% in two years despite offering lots of subsea services to government to supplement their core oil and gas business).
And for the major defense companies this is clearly an area of some interest (Lockheed has mine-sensing drones as a part of their huge Littoral Combat Ship program, and Koyfman quotes this article about the failures of those drones, and General Dynamics just bought the underwater drone outfit Bluefin for an undisclosed price last month).
That means I have no idea what the opportunity is for this company, so we’ll rely on them to tell us what they think their opportunity is, and we’ll keep in mind that we should probably discount that prediction since it’s coming from the company itself.
There is no recent analysis of the opportunity or potential from the company since they acquired Marine Robotics, but presumably if Marine Robotics had any immediate sales prospects they wouldn’t have sold themselves… and we do have an investor relations presentation from last Summer to peruse here.
That presentation lays out the market opportunity that Kraken saw for themselves as their new products enter the marketplace — this is what they say about the status nine months ago:
“Customers include Lockheed Martin, Atlas Elektronik, DeepOcean, Fraunhofer along with several navies
“Kraken’s AquaPix® SAS sonar integrated with almost all AUV manufacturers
“Pursuing $50M+ of new business”
So it sounds like their AquaPix sonar has been used on several different kinds of underwater drones, and that’s been their major product so far. They say that the addressable size of that market in 2015 was $100 million, and that their market will grow when they introduce their “smart towfish” sensor this year (market size $250M) and their Modular AUV in 2017 (total market size $500M, which then grows to $750M in 2018 and $1B in 2019). I don’t know where they got those numbers, but presumably they know the market a lot better than I do.
I’d really like to see the full year financials for 2015 instead of just the first three quarters, to see if sales of AquaPix picked up at all, but the product has been available for at least a few years (they have quotes from folks who used it in 2014, and it was tested with good success by Canadian, US and Australian government entities in 2012-2013). For the first three quarters of 2015, revenues averaged about $500,000 a quarter and expenses averaged about $700,000 a quarter.
They’ve apparently brought on some engineers with their Marine Robotics acquisition, so perhaps they will have R&D expenses in future quarters — all that’s included now (in Ycharts, at least) are the selling, general and administrative expenses, which seems a little odd for a company that’s actively developing new products.
Most of their announced revenue seems to come from government or grant support (like $495,000 from Canada last month), which leads me to think that they may be a long way from achieving commercial scale… though they did announce a couple commercial contracts since July, $325,000 from ECA Robotics and a $1.5 million order for their Katfish towed sonar drone from a major defense contractor (most of that revenue probably wasn’t recognized last year).
Their AquaPix seems to be in use in at least test cases, and available for purchase, but I don’t see any real financial impact from it on the books yet. If the market opportunity is $100 million for them in 2015, as they say in their presentation, and most of their revenues are from actual product sales, then their market share is something in the neighborhood of 1%.
Which, of course, is probably why it’s a little $15 million company — this is still a startup that probably shouldn’t be subjecting itself to the public penny stock markets, in my opinion, and it certainly doesn’t seem like they’re in a position to release a big new product and manufacture hundreds of drones anytime soon, though I don’t know how long it would take to ramp up manufacturing in this business. I’d rather see these little companies be shepherded by VC firms that can drive their development with a longer time horizon (and not promise investors that they’ll rise 2,000% in six months), though if the product is unique and valuable (I can’t judge that at all) the far greater likelihood, I expect, is that someone in either marine, defense or engineering technology just buys them out to get the engineers and the AquaPix patents.
So… does that sound like the kind of microcap stock you’d like to invest in? The shares are around 23 cents now (Canadian), and have mostly been in the 15-26 cent range over the past year, relatively steady for such a small stock… which probably means it hasn’t been pitched by a newsletter before. New attention, if it proves to be sustained (I’ve only seen the ad this morning, so who knows whether Koyfman will really push the idea or not), can really have a big impact on microcaps like this — both positive and negative, because if a microcap gets sustained positive attention for a little while and drives the shares up just by virtue of the fact that 100 or 1,000 or 10,000 investors now follow the company and want to buy it, then just the absence of attention at some future point can cause a crash that appears to have no fundamental reason.
If it rose in value by 2,400%, (which I’ll bet it won’t do in the next year, of course — taking the “under” is always an easy bet in these situations), then it would grow to be roughly a $300 million company… assuming they don’t sell any shares along the way. Looks like an interesting business, they make some strong claims about their product being better than the competition, and they have minimal revenue so far, but they’re also a minnow swimming among giant sharks — what happens from here is beyond my guessing, but I’d be happy to listen if you want to share your opinions with a comment below.