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:
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“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 are the hints for one:
“Penny Cap Stock #1
“A ‘Growth Engine’ With a Fat List of Blue-Chip Customers…
“This San Jose, California-based tech company is one of the fastest-growing in the world, with sales ballooning 916% higher in the most recent quarter. Of course, immense growth is a foregone conclusion when 1) you’re positioned inside of the world’s hottest growth industry – wireless, 2) your superior technology is protected by 108 different patents, and 3) blue-chip customers are already beating down the door. With all the classic traits of a ‘Daily 41’ stock, this one is ready to double any minute.”
This one looks to the Thinkolator very much like GigOptix (GIG), a ridiculously small company that develops high speed networking chips and optical networking equipment. And they did have sales “balloon 916% higher” … but that was about a year ago. Since then, their revenues have been falling — apparently mostly because the 2012 spike was “end of product life” sales that weren’t going to be repeated. They do say they expect more growth to come as of the last quarterly report, you can see the quick fact sheet here. Don’t know if it will double, but Louis Basenese also touted it as a “take a small gamble” pick back in this “Special Report” in 2011 and, while it has bounced around some, the last two years have really just been a continuation of the slow decline the stock has had since it recovered from the 2009 crash. There’s also some kind of patent dispute going on with this company of late, I don’t know if there’s anything to it (and yes, GigOptix has claimed 108 patents in the recent past, so that’s another match for the tease.
“Penny Cap Stock #2
“A Precious Second Chance At Historic Gains…
“You’ve likely heard of 3-D printing by now, right? It’s an amazing breakthrough that turns a digital image into a three-dimensional, solid object. The technology is quickly having a major impact on the market. And my readers have already made a ton of money as a result. One elated reader wrote me and said, ‘I only had 200 shares, but I’m delighted with my $3,000 gain.’ With that in mind, a San Diego, California-based company is now ‘3-D printing’ the unthinkable. The technology is almost inconceivable. But I assure you that it’s very real. With all the classic traits of a ‘Daily 41’ stock, this one is ready to double any minute, too.”
This one is very likely the volatile and hotly-debated Organovo (ONVO), which is working on 3D bioprinting technology — “creating functional human tissue on demand.” This is a company that shows up as being profitable with a trailing PE of 40, but presumably that was some kind of special payment or non-recurring thing, their revenue of $1 million over the past twelve months, according to the summary at Yahoo Finance, wouldn’t naturally lead you to expect net income of $9 million. They are a decent size, with a market cap of about $450 million, and you can certainly find plenty of arguments for and against the stock — which has already seen short-term movements of 100% up and 40% down in just the last two months. It’s a great story, printing with biological material, but this is still very much cutting edge stuff in a field where approvals take years — you’re not going to be able to go print yourself a new liver next month if you’ve been spending too much time at the tavern on the corner.
“Penny Cap Stock #3
“It’s ‘Game On’ for This Ingenious Tech Innovator…
“This Toronto-based innovator has brilliantly positioned itself on the frontline of an industry forecast to explode into an $82-billion behemoth by 2015. It’s a videogame company – one whose brilliant move to piggyback major cable providers is allowing them to tap consumers previously thought to be unreachable. Such an immaculate, untapped market impressed Intel enough to pump a half-million dollars into the company. And with heavyweights like Activision, Electronic Arts and Disney already having inked deals, this one could explode any second.”
This one is almost certainly TransGaming (TNG in Toronto, TNSGF on the pink sheets). They would have called themselves a “Smart TV” company back in 2008 when that seemed like a cool “up and coming” idea, but now they’re calling themselves a “social gaming” company. Their basic product seems to be called “GameTree”, which looks like it’s “video games on demand” through your cable service or online. And Intel did indeed invest half a million dollars in the company through their Intel Capital venture capital arm, though that’s a small investment and that was four years ago.
TransGaming says they’re well on the road to reorganizing and rebuilding themselves as of their last report (last week), I have no idea if that’s true or not and had never heard of them before today — this is an absurdly small company, with a $9 million market cap, and they’ve been doing poorly for years after peaking at a dollar a share or so not long after that Intel Capital investment. The stock is now down to about 12 cents, and they also have about three million in debt, so there’s clearly still plenty of uncertainty about whether any of their products will have any traction … if there was a clear and compelling business case for the stock, or a unique and desirable technology, it would be awfully surprising if they hadn’t been bought out by someone by now — anyone you’ve heard of could buy them without blinking an eye, INTC generates enough free cash flow to buy a $12 million company like this in about 14 hours.
Worthwhile or not? You really can’t tell with tiny companies like these — they do appear to be real companies at least, distinguished from the pointless pump and dump operations by the fact that they have productive employees and actual operations and revenue, if not necessarily profits, but companies of this tiny size in competitive industries have a tough row to hoe and none of them have glowing financials that make you stop and drool. If you like them after researching them, then enjoy. I’m unlikely to look much more closely at stocks of this size, though I’m sure Organovo, with it’s cool bioprinting story, will find it’s way into future teasers at some point.
I don’t have time to look into the other few he pitches in that ad right this moment, but in case you’re ready for some more blather from yours truly, I’ll share a few more points they make in the ad that caught my attention as I was reading through it:
“Data we used to prove that, on average, 41 different stocks in a certain corner of the market will double in price every single day…
“And when you also consider a known methodology exists that helps pinpoint exactly which 41 stocks are ready to double…
“A methodology single-handedly responsible for amassing Harvard’s $34 billion endowment, the largest in history…
“… we built a proprietary screening process capable of pinpointing exactly which stocks will be among the 41 that double in price tomorrow.
“And then publish the results to our readers.
“The screening process is entirely systematic.
“Human emotion is completely left out of the picture.
“No hunches. No guesswork. And hot tips or hyped-up circumstances are absolutely eliminated from the equation.
“The filters are modeled after the ones Harvard uses to manage the largest endowment in the world.”
OK, that’s just hooey. Harvard’s endowment has done extraordinarily well over the decades, with market-beating returns, but it does not follow a single methodology and it’s also the largest in history partly because … they’ve gotten a lot of huge donations for decades. Harvard’s endowment management company clearly and obviously doesn’t have a methodology that can predict which microcap stocks will double every day. They do, I’m sure, keep emotion out of their decisionmaking process when deciding which hedge funds and alternative investment managers to hire, and when deciding how to allocate their funds, so perhaps you can stretch and say that your screening strategy is similar to theirs.
Basenese also talks about and quotes from the “Princeton Study” about these “restricted stocks” …
“We verified it, of course, by means of the Princeton study I’ve been referring to…
“The study, dubbed ‘The Restricted Portfolio,’ confirmed everything, concluding that…
‘Tiny stocks tend to be less well-covered by analysts.’ – page 16, line 6
‘Institutional investors and institutions tend to avoid the smallest stocks.’ – page 16, line 9
“That is, they ‘tend to avoid’ ever recommending the smallest stocks to the public.
“They have no reservations about stuffing their own house accounts full of shares, which happens with great frequency.”
Which is more exaggeration, and includes more quotes from a study that isn’t particularly germane to Basenese’s point — you can see the original article here if you like, it’s actually entitled “Thy Neighbor’s Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers.” And it basically just makes the point that mutual fund managers tend to buy the same stocks as other mutual fund managers … the part about “avoid the smallest stocks” is just that, institutional investors and mutual fund managers almost never pay a lot of attention to them because they can’t build meaningful positions and they can’t enter and exit the stock without impacting the shares substantially.
So yes, there probably are 41 stocks that double in an average trading day — with some regularity there are also stocks that jump by 1000% in a day. That doesn’t mean they’re the kinds of stocks you want to look for or to build a portfolio around — these teensy stocks are at least as likely to be cut in half in a day as they are to double in a day, I’d wager, and they’re probably best thought of as candy bars — spending a buck or two on one every now and again probably won’t hurt you much, but if you’re eating four Snickers bars for lunch every day you’re likely not doing yourself any favors. If you’ve got opinions on any of these little teensy stocks feel free to share them with a comment below.