Trading OTC And Penny Stocks
Dec. 29, 2011 11:50 AM ET|35 comments| Includes: ABOT, DLHC, GMCR, GOIG, MNK, MNST, SCSS
Brian Nichols
Value, research analyst, author, long only
(8,792 followers)
Penny and Over-The-Counter stocks are considered by many to be the best way to an easy get rich return in the stock market. And although there is no doubt that many have become wealthy from investing in penny stocks or OTC stocks most of the time the investment will end with a total loss or maybe an addiction to day trading popular penny stocks/OTC. The following article will take a look at penny stocks and its advantages and disadvantages; and will then look at two penny/OTC stocks that I'm watching along with some of the best returns during the last ten years. My goal is to be fair, informative, and maybe give investors a better perspective on both the dangers and rewards of buying these stocks.
Unfortunately there are many, who are, rookie investors that fall in the trap of penny stock investing; in an attempt to make a quick buck. There are 100's if not 1000's of penny stock newsletters and small cap wizards who send newsletters and claim to return ridiculous gains in a matter of days. And although it's difficult to identify the intention of these newsletters I am sure that some are written out of one's own self interest. However, there are some that are legit and believe that what they are selling is true and has legitimate meaning behind the newsletter, and sometimes those writing the newsletters, or operating the sites, have been quite successful in trading penny or OTC stocks.
Most of the time an OTC or penny stock will trade with a high level of volume and is easily manipulated because of its activity compared to its market cap. Penny stocks are often not listed on the NASDAQ, or any other major exchange, because they are unable to meet the listing requirements. A company that trades on the OTCBB trades with very few, if any, listing requirements but are required to provide financial statements to the SEC, or another banking regulator.
The chances of buying a micro-cap stock and becoming a millionaire are slim to none. And from what I've seen over the last ten years most who attempt to purchase these stocks go about purchasing the stocks all wrong. Therefore I would like to share a couple stocks that I believe present the potential to return gains along with a few points to remember of what "not to do" when purchasing high-risk penny/OTC/ or other micro-cap stocks.
The best way for me to explain what "not to do" is to give an example -- if you look at stocks that fall in this category you would probably find a common trend -- almost all trade with a loss. This fact decreases your odds even more than what they already are; and it's important to remember that with most of these stocks you are not investing your are gambling. Therefore when you purchase a stock such as GOIP Global (OTCPK:GOIG) which has lost 85% of its value year-to-date then you are setting yourself up for failure. This example is the most important point to remember: if you are choosing to invest in these stocks then you want to purchase one that is trading with a yearly gain because it increases your odds in this game that is similar to roulette.
GOIP Global is a good example because it's had several periods of large gains; trades with high volume; and had a significant amount of investor optimism because of the services in which it provides. The company attracted a high level of interest because of its services in the mobile space including applications. Some investors may have viewed this stock as a way to capitalize in a growing market and many viewed the stock as the next great return. However, the stock's "down days" were much more than its days of gains and as a result investors have most likely lost everything. However, investors did have the right idea when purchasing this stock; which was an attempt to capitalize on a growing industry. The only problem is that its services weren't as sought after as its stock and it resulted in dismal fundamentals and a now 85% year-to-date loss.
The attention that GOIG garnished was well deserved at the time because it was providing a service that could grow. However, like most companies of its size the stock fell. I believe that as an investor if you're going to purchase micro-cap stocks then you must purchase stocks that have a product or service that you believe is growing. And although the company may still fall it does give you a better opportunity than a stock with a service or product that you don't understand. Also, you want to purchase stocks that are trading higher which shows that despite its size there are more investors buying shares, and holding, than what are selling shares.
Over the last decade there have been a handful of stocks that have either grown from small cap stocks into large companies or have fallen from being a large company and then recovered to post large gains. Stocks such as these are what drives the micro-cap investor and creates dreams of finding the next massive return. Therefore I've listed four of the best performing stocks of the last 10 years: each of these stocks were small at one time and grew into a larger company with massive returns. And what the chart below illustrates is an initial investment of just $5,000 and what the gains would've been if you would have purchased the stock during its micro-cap days.
Company Ticker Date Purchase Purchase Price Market Cap Today's Price Return
Green Mountain Coffee (NASDAQ:GMCR) Sep. 2002 $0.98 $151.5 million $45.31 $231,000
Select Comfort (NASDAQ:SCSS) Dec. 2008 $0.19 $10.67 million $22.04 $580,000
Hansen Natural (HANS) Mar. 2003 $0.49 $42.66 million $95 $970,000
Questcor Pharm (QCOR) Aug. 2007 $0.35 $21.96 million $43.39 $620,000
The massive returns of these four stocks are what micro-cap investors seek, and although they are unlikely, they do occur. As I said, the most important points to remember is that the micro-cap company that you purchase produces or provides a product or service that you believe is transcendent; and that the stock you are purchasing is trending higher, because if not you are simply gambling. Even if these factors are present it doesn't assure that the stock will return this level of gains. But in a market where trends, momentum, and speculation are of utmost importance knowing what you are buying, and that others are buying as well, can be the difference between gains and losses.
Key developments are important to any company's performance but to a micro-cap stock it can be the difference between a massive gain and large loss. Two stocks that trade with each of the factors that I've discussed, along with significant developments, are TeamStaff (TSTF) and Abot Mining Company (OTCPK:ABOT).
Abot Mining Company is a micro-cap stock with an average of 13.77 million shares traded daily. The stock's volume has been much higher as of late, with several days of 50 million shares plus traded; following a slew of key developments that have created optimism. The stock's trading with gains of nearly 200% in 2011 at just under $0.03 per share. The company's a U.S. based mining company engaged in discovering, acquiring, developing, producing, and marketing precious and semi-precious metal properties. The company's created interest with its aggressive exploration program; new discoveries; and its development of mining properties with long-life and low cost operations.
The last year's been quite rewarding for investors of this small company after it provided large gains. Because of the company's size most would assume that it's a speculative company whose growth is dependent on the outlook of precious and semi-precious metals. And although some are bearish on the outlook of these metals I've remained quite bullish regarding its future and I believe that its recent pullback presents a good opportunity for an investment in stocks within this industry.
The speculation that's driven this stock higher during the last year is now being backed with developments and signs that the company could grow much larger in the future. The company recently acquired more than 300 acres of gold and silver property in the Tecuala mining district in Mexico. This shows the company's expanding into new areas and is finally buying property to return income. And with the storied success of the Mexican region it appears the company did its homework in where to purchase the property. The area is mined by several private and public companies and after an initial exploration most are encouraged that the land will provide enough capital for the company to venture out into new properties through acquisitions and expansion. The company's test runs have been successful which include allocating 1,000 tons of ore along with encouraging news that the company will increase the tonage and frequency of its production.
Overall, it appears that this very small company is moving in the right direction and as an investor I've chosen to invest a small position in the company. The coverage of the company remains very light and the future is still uncertain yet companies such as this could provide large gains once production and revenue become consistent. In fact, production is expected to launch early in 2012 which should provide more gains to its shareholders, assuming there are no future problems. One issue that investors encounter with these micro-cap stocks is a lack of information. And although there is a lack of information related to the company itself; the company has done a great job at keeping investors informed of progress. This fact along with its recent performance and the developments surrounding its potential in 2012 is enough to entice a small position and I believe this stock is much better than some of the speculative micro-cap or OTC stocks trading with massive loss.
I've remained bullish regarding the future of TeamStaff and have spoken about the company quite often; and its CEO Zachary Parker is making changes to grow the company during the immediate future. The company provides logistics, healthcare support, and technical services for various federal agencies along with branches of the military. And much like ABOT the stock has traded higher over the last year, with a 255% gain due to several large contracts to provide various services for the government that will create higher earnings.
Like most microcap companies TSTF has its share of problems but it also has several encouraging developments that could lead to much higher profits. The company has $65.5 million as an accumulated deficit and posted a much wider loss than what investors were anticipating during its most recent quarter. The stock trades with a market cap of just under $12 million and I anticipate its cap growing much larger in the coming years because of its increased presence in both the Army and Navy with more profitable jobs instead of IT or low-end jobs. The company's focus on large contracts that will return higher revenue and less costs should allow for profitability; and I believe that because of government cuts, outsourcing will increase and create better earnings for TeamStaff.
For the first time, in many years, TSTF is well positioned for long-term growth with contracts that will allow the company to bid on various high profit jobs. Some of the company's most recent contracts include: TACOM omnibus award worth $225 million through 2012; multiple award contract with the VA worth a max of $9.85 million over 5 years; awarded a "BPA" from VA for outpatient pharmacy worth a max of $140 million over five years; and a prime contract with the Naval Surface Warfare Center which includes a 3 year base and a 5 year award period where the company bids on $5.3 billion worth of services per year. If you look at the amount of these contracts and compare it to the market capitalization of TSTF you would see why the stock has posted gains of 255% during the last year. However, the tricky part is when the awards are paid; some are paid immediately and others aren't paid until the task is completed which affects fundamentals during the immediate future. Yet overall the potential for the company is much higher than it was just one year prior and because of these profitable contracts I believe the opportunities are endless for this company. To read more regarding TSTF and its contracts and future click here.
As with any micro-cap stock the future is speculative. However, history does show that ever so often a small company will grow and return large gains. Some of the most successful entrepreneurs in American history began their career in a basement or at a kitchen table and then grew the company into multibillion dollar corporations; the key is to not invest too much into these stocks and to continue making investments based on growth potential. As I demonstrated above it doesn't take a large investment for a micro-cap stock to return massive gains; and I believe that with the two stocks I've highlighted growth is very possible. Micro-cap stocks remain dangerous to investors and usually attract a large number of rookie investors looking to make that quick million. But unfortunately investing rarely works that way; and the chances are very small of finding that next large company within the microcap realm. I will conclude by saying the only way to invest in microcap stocks is to buy stocks that are trending higher and have significant key developments that have the potential to change the fundamentals; much like TSTF and ABOT, but even then the chances of million dollar returns are very slim.
Disclosure: I am long QCOR, OTCPK:ABOT, TSTF.
Dec. 29, 2011 11:50 AM ET|35 comments| Includes: ABOT, DLHC, GMCR, GOIG, MNK, MNST, SCSS
Brian Nichols
Value, research analyst, author, long only
(8,792 followers)
Penny and Over-The-Counter stocks are considered by many to be the best way to an easy get rich return in the stock market. And although there is no doubt that many have become wealthy from investing in penny stocks or OTC stocks most of the time the investment will end with a total loss or maybe an addiction to day trading popular penny stocks/OTC. The following article will take a look at penny stocks and its advantages and disadvantages; and will then look at two penny/OTC stocks that I'm watching along with some of the best returns during the last ten years. My goal is to be fair, informative, and maybe give investors a better perspective on both the dangers and rewards of buying these stocks.
Unfortunately there are many, who are, rookie investors that fall in the trap of penny stock investing; in an attempt to make a quick buck. There are 100's if not 1000's of penny stock newsletters and small cap wizards who send newsletters and claim to return ridiculous gains in a matter of days. And although it's difficult to identify the intention of these newsletters I am sure that some are written out of one's own self interest. However, there are some that are legit and believe that what they are selling is true and has legitimate meaning behind the newsletter, and sometimes those writing the newsletters, or operating the sites, have been quite successful in trading penny or OTC stocks.
Most of the time an OTC or penny stock will trade with a high level of volume and is easily manipulated because of its activity compared to its market cap. Penny stocks are often not listed on the NASDAQ, or any other major exchange, because they are unable to meet the listing requirements. A company that trades on the OTCBB trades with very few, if any, listing requirements but are required to provide financial statements to the SEC, or another banking regulator.
The chances of buying a micro-cap stock and becoming a millionaire are slim to none. And from what I've seen over the last ten years most who attempt to purchase these stocks go about purchasing the stocks all wrong. Therefore I would like to share a couple stocks that I believe present the potential to return gains along with a few points to remember of what "not to do" when purchasing high-risk penny/OTC/ or other micro-cap stocks.
The best way for me to explain what "not to do" is to give an example -- if you look at stocks that fall in this category you would probably find a common trend -- almost all trade with a loss. This fact decreases your odds even more than what they already are; and it's important to remember that with most of these stocks you are not investing your are gambling. Therefore when you purchase a stock such as GOIP Global (OTCPK:GOIG) which has lost 85% of its value year-to-date then you are setting yourself up for failure. This example is the most important point to remember: if you are choosing to invest in these stocks then you want to purchase one that is trading with a yearly gain because it increases your odds in this game that is similar to roulette.
GOIP Global is a good example because it's had several periods of large gains; trades with high volume; and had a significant amount of investor optimism because of the services in which it provides. The company attracted a high level of interest because of its services in the mobile space including applications. Some investors may have viewed this stock as a way to capitalize in a growing market and many viewed the stock as the next great return. However, the stock's "down days" were much more than its days of gains and as a result investors have most likely lost everything. However, investors did have the right idea when purchasing this stock; which was an attempt to capitalize on a growing industry. The only problem is that its services weren't as sought after as its stock and it resulted in dismal fundamentals and a now 85% year-to-date loss.
The attention that GOIG garnished was well deserved at the time because it was providing a service that could grow. However, like most companies of its size the stock fell. I believe that as an investor if you're going to purchase micro-cap stocks then you must purchase stocks that have a product or service that you believe is growing. And although the company may still fall it does give you a better opportunity than a stock with a service or product that you don't understand. Also, you want to purchase stocks that are trading higher which shows that despite its size there are more investors buying shares, and holding, than what are selling shares.
Over the last decade there have been a handful of stocks that have either grown from small cap stocks into large companies or have fallen from being a large company and then recovered to post large gains. Stocks such as these are what drives the micro-cap investor and creates dreams of finding the next massive return. Therefore I've listed four of the best performing stocks of the last 10 years: each of these stocks were small at one time and grew into a larger company with massive returns. And what the chart below illustrates is an initial investment of just $5,000 and what the gains would've been if you would have purchased the stock during its micro-cap days.
Company Ticker Date Purchase Purchase Price Market Cap Today's Price Return
Green Mountain Coffee (NASDAQ:GMCR) Sep. 2002 $0.98 $151.5 million $45.31 $231,000
Select Comfort (NASDAQ:SCSS) Dec. 2008 $0.19 $10.67 million $22.04 $580,000
Hansen Natural (HANS) Mar. 2003 $0.49 $42.66 million $95 $970,000
Questcor Pharm (QCOR) Aug. 2007 $0.35 $21.96 million $43.39 $620,000
The massive returns of these four stocks are what micro-cap investors seek, and although they are unlikely, they do occur. As I said, the most important points to remember is that the micro-cap company that you purchase produces or provides a product or service that you believe is transcendent; and that the stock you are purchasing is trending higher, because if not you are simply gambling. Even if these factors are present it doesn't assure that the stock will return this level of gains. But in a market where trends, momentum, and speculation are of utmost importance knowing what you are buying, and that others are buying as well, can be the difference between gains and losses.
Key developments are important to any company's performance but to a micro-cap stock it can be the difference between a massive gain and large loss. Two stocks that trade with each of the factors that I've discussed, along with significant developments, are TeamStaff (TSTF) and Abot Mining Company (OTCPK:ABOT).
Abot Mining Company is a micro-cap stock with an average of 13.77 million shares traded daily. The stock's volume has been much higher as of late, with several days of 50 million shares plus traded; following a slew of key developments that have created optimism. The stock's trading with gains of nearly 200% in 2011 at just under $0.03 per share. The company's a U.S. based mining company engaged in discovering, acquiring, developing, producing, and marketing precious and semi-precious metal properties. The company's created interest with its aggressive exploration program; new discoveries; and its development of mining properties with long-life and low cost operations.
The last year's been quite rewarding for investors of this small company after it provided large gains. Because of the company's size most would assume that it's a speculative company whose growth is dependent on the outlook of precious and semi-precious metals. And although some are bearish on the outlook of these metals I've remained quite bullish regarding its future and I believe that its recent pullback presents a good opportunity for an investment in stocks within this industry.
The speculation that's driven this stock higher during the last year is now being backed with developments and signs that the company could grow much larger in the future. The company recently acquired more than 300 acres of gold and silver property in the Tecuala mining district in Mexico. This shows the company's expanding into new areas and is finally buying property to return income. And with the storied success of the Mexican region it appears the company did its homework in where to purchase the property. The area is mined by several private and public companies and after an initial exploration most are encouraged that the land will provide enough capital for the company to venture out into new properties through acquisitions and expansion. The company's test runs have been successful which include allocating 1,000 tons of ore along with encouraging news that the company will increase the tonage and frequency of its production.
Overall, it appears that this very small company is moving in the right direction and as an investor I've chosen to invest a small position in the company. The coverage of the company remains very light and the future is still uncertain yet companies such as this could provide large gains once production and revenue become consistent. In fact, production is expected to launch early in 2012 which should provide more gains to its shareholders, assuming there are no future problems. One issue that investors encounter with these micro-cap stocks is a lack of information. And although there is a lack of information related to the company itself; the company has done a great job at keeping investors informed of progress. This fact along with its recent performance and the developments surrounding its potential in 2012 is enough to entice a small position and I believe this stock is much better than some of the speculative micro-cap or OTC stocks trading with massive loss.
I've remained bullish regarding the future of TeamStaff and have spoken about the company quite often; and its CEO Zachary Parker is making changes to grow the company during the immediate future. The company provides logistics, healthcare support, and technical services for various federal agencies along with branches of the military. And much like ABOT the stock has traded higher over the last year, with a 255% gain due to several large contracts to provide various services for the government that will create higher earnings.
Like most microcap companies TSTF has its share of problems but it also has several encouraging developments that could lead to much higher profits. The company has $65.5 million as an accumulated deficit and posted a much wider loss than what investors were anticipating during its most recent quarter. The stock trades with a market cap of just under $12 million and I anticipate its cap growing much larger in the coming years because of its increased presence in both the Army and Navy with more profitable jobs instead of IT or low-end jobs. The company's focus on large contracts that will return higher revenue and less costs should allow for profitability; and I believe that because of government cuts, outsourcing will increase and create better earnings for TeamStaff.
For the first time, in many years, TSTF is well positioned for long-term growth with contracts that will allow the company to bid on various high profit jobs. Some of the company's most recent contracts include: TACOM omnibus award worth $225 million through 2012; multiple award contract with the VA worth a max of $9.85 million over 5 years; awarded a "BPA" from VA for outpatient pharmacy worth a max of $140 million over five years; and a prime contract with the Naval Surface Warfare Center which includes a 3 year base and a 5 year award period where the company bids on $5.3 billion worth of services per year. If you look at the amount of these contracts and compare it to the market capitalization of TSTF you would see why the stock has posted gains of 255% during the last year. However, the tricky part is when the awards are paid; some are paid immediately and others aren't paid until the task is completed which affects fundamentals during the immediate future. Yet overall the potential for the company is much higher than it was just one year prior and because of these profitable contracts I believe the opportunities are endless for this company. To read more regarding TSTF and its contracts and future click here.
As with any micro-cap stock the future is speculative. However, history does show that ever so often a small company will grow and return large gains. Some of the most successful entrepreneurs in American history began their career in a basement or at a kitchen table and then grew the company into multibillion dollar corporations; the key is to not invest too much into these stocks and to continue making investments based on growth potential. As I demonstrated above it doesn't take a large investment for a micro-cap stock to return massive gains; and I believe that with the two stocks I've highlighted growth is very possible. Micro-cap stocks remain dangerous to investors and usually attract a large number of rookie investors looking to make that quick million. But unfortunately investing rarely works that way; and the chances are very small of finding that next large company within the microcap realm. I will conclude by saying the only way to invest in microcap stocks is to buy stocks that are trending higher and have significant key developments that have the potential to change the fundamentals; much like TSTF and ABOT, but even then the chances of million dollar returns are very slim.
Disclosure: I am long QCOR, OTCPK:ABOT, TSTF.
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