Should you “Lift Your Restrictions” for Super Penny Stocks?

Are there really 41 stocks you can buy that double every day? Looking at the latest WSD Insider pitch.

By Travis Johnson, Stock Gumshoe, September 3, 2013

I like little stocks. I like small caps, I like to dabble in microcap stocks from time to time, and it’s definitely more fun to sniffle around the edges of the market and research stocks you’ve never heard of before than it is to read yet another article about Apple (AAPL) or ExxonMobil (XOM).

But I don’t think I’m as much of an enthusiast as Louis Basenese, who is making a pitch in ads for his WSD Insider that you should “lift your restrictions” and trade these little teensy weensy stocks that can double in a day — here’s the intro from a recent ad that many of you have been asking about:

“This is the only investment on earth in which the price doubles, on average, 41 different times each day. And every day, for that matter.

“In fact, when the Opening Bell sounds on the floor of the New York Stock Exchange at exactly 9:30 AM EST tomorrow morning…

“The next 41 price doubles will mint the fortunes of another 151,300 ordinary people. According to estimates derived from the latest trading-floor data, that is.

“The same thing will happen the following day, too.

“And again the next day. Like clockwork.

“By the end of the week, an estimated 765,500 people will have just enjoyed the best week of their life.

“And it only takes $50 to begin amassing a fortune.”

He includes a quote from CNNMoney as follows:

“You don’t need to put a lot of capital at risk to make a return.”

Which would make you think that CNNMoney, a respected brand-name publisher, endorses this idea of trading penny stocks — when the article they’re quoting is probably this one, “Penny stocks: Too fast, too furious” which was published near the March 2009 market bottom (it was about the wild trading in stocks like Citigroup and AIG when they were penny stocks after being crushed). I don’t know that this author is particularly correct either, but a more representative quote from the article might be this one:

“But before you think that active trading in stocks trading so low means there’s value there, think again. The flurry of activity is more likely the thrashings of a badly wounded company than the stirring of a firm rising from the dead.”

Just a reminder that a copywriter can find a good endorsement quote to support pretty much any position.

But anyway, the reason this came up again today, when I think I covered a penny stock pick of Mr. Basenese’s not so long ago, is that so many folks are asking about the latest “lift your restrictions” teaser.

Basenese teases that there are an average of 41 stocks that double every day on the stock market, and that’s quite likely true — there are thousands and thousands of stocks out there, many of them teensy and unlisted companies that trade over the counter, and an average day might lead to one stock that’s bigger than $100 million in market cap doubling on a takeover bid or a big clinical trial for a key drug or a key contract win … but for every stock that doubles for fundamental reasons there are probably a dozen or more that double just because they’re getting a big new wave of investor attention. Occasionally that attention comes from legitimate newsletters like Wall Street Daily that actually are trying to recommend good stocks to their readers … but more often, I’d wager, that attention comes from stock promoters who are trying to “pump and dump” their wares.

Stock promoters and pump and dump scams might make for great trading opportunities for the nimble and lucky among us, but trying to trade on a stock that someone else is manipulating means you’re taking a great risk that their manipulation won’t work in your favor — buying a stock because you think the promoter is going to drive it from 50 cents to $2 is exciting, and it might even work sometimes, but you run the risk of either starting to believe the puffery that the promoter is putting out (“the stock’s going up! It must be real!”) or you hold out too long and you’re still sitting there the day the stock drops from $3 to 15 cents after the promoters and pumpers sell their own shares and leave it to twist in the wind. I won’t go off on a tangent on this and I don’t mean to imply that Basenese is a stock promoter or a pump and dump guy — I’m quite sure he isn’t. If you want to see more of my ranting on this you can see a longer comment I shared about stock promoter Tobin Smith here a few months back. Just wanted to point out that the fact that 41 (I’ll take Louis’ word for it on the number) stocks might double every day isn’t necessarily a good thing for most of us.

But hey, finding exciting little stocks with a real fundamental story and the potential to double for good reasons is worth a try — even if we accept that any kind of search for high-potential penny stocks means we’re going to be reaching for pitches and swinging for home runs and therefore probably booking a bad overall batting average. If you buy penny stocks that are recommended by a newsletter perhaps you find some that are a bit “pre-vetted” — but, of course, newsletter guys get ’em wrong a lot of the time, too, and your risk there is that there’s a captive audience of at least a few thousand investors (for some letters it’s more than 100,000) who own this stock because the newsletter told them it was a good stock. That likely means the stock is higher than it would otherwise be — and it also means that if the newsletter pundit changes his mind the stock could certainly have a few very bad days if those thousands of subscribers all try to sell. It’s not the same pernicious risk of the illegal or semi-legal pump and dump operations, but it does mean extra volatility when newsletters with wide circulations recommend tiny stocks.

Sorry, I seem to be having even more trouble getting to the point than usual today. Must be the harsh re-entry after vacation … or perhaps it’s the fact that the Little Gumshoes still haven’t started school so there’s a fair amount of ruckus here at Gumshoe Manor today.

And the point is — Basenese is telling us that he can find good candidates to be in the ranks of these “41 daily doublers” in the market — and he teases a few of ’em for us. Let’s see if we can name some and give you something to chew on. Here ar