The Funky Friday Rundown (8/24/07)

(Note: Every Friday, I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations. They are just some thoughts. )



1) Seaway Valley Capital Corporation (SWVC) -- Its nice to see this company's attempt in acquiring a decent brand-named business, but is it really going to make an impact to elevate this stock above the pink sheet gravity...? Is there really a future here? Where is there a true competitive edge that can effectively launch and sustain company growth? I just can't see it.

2) Xechem International, Inc. (XKEM) -- There might be some long-term potential here. It pains me to say this though, but bear in mind that there are reasons why companies tend to stay away from operating in Africa. Nevertheless, in the short- to medium-term, I'm not expecting much progress on the stock ticker until the facilities are fully operational and doing business.

3) Burn Media Ltd (BUNM) -- Long-Term prognosis is very hazy. Not exactly a revolutionary idea, but like many modern-day business ventures it could easily be turned into one overnight with a little tweaking. Might be interesting to keep an eye on, but I see nothing here that says buy at the current state of the company. If popularity soars, we'll have a different story. Don't hold your breath.

4) Eternal Image (ETIM) -- I like anything under $0.004. Going to have to wait a while for this one to take off.

5) Ifinix Corp (INXR) -- I think this one might spike again, but I'm staying out.

The Funky Friday Rundown (8/17/2007)

(Note: Every Friday [I do not post on Saturday or Sunday], I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations... just some thoughts. )

1) Global Diamond Exchange, Inc. (GBDX) – Interesting volume on today’s close. I like the likeliness of the company being turned private, but my caution bone is starting to tingle over the lack of the company’s transparency.

2) Phoenix Associates Land Syndicate (PBLS) – Verification from Komex needed, but clear sailing otherwise. In my opinion, the company was undervalued from both a current and long-term view even before the massive contract.

3) Ifinix Corp (INXR) – Yeup…. Might be an interesting short-term play, but I’m not seeing a bright future if a brokerage doesn’t adopt the software.

4) Esprit Financial Group Inc. (EFGO) – I’ll admit that I know little about this one, but there’s a very strong aura of desperation surrounding the company's focus. Personally, I haven’t seen anything that catches my eye for a sustainable long-term future.

5) Eternal Image Inc (ETIM) – Company’s trading sideways staying aloft in light of pink sheet gravity. I love the future of this company, the industry hasn’t been changed in tens if not hundreds of years.

Reverse Split Death

Contrary to popular belief, there is no such thing as a true bottomed-out share price. It’s almost a funny concept that those who trade on the upper exchanges believe that a share price of $0.01 (one penny) is the lowest a stock can go. Any penny stock investor (PSI) knows this to be a myth when they start venturing into the subpenny stocks. Yet it’s also a common mistake for those on the lower exchanges to believe that $0.0001 (one hundredth of a penny) is the lowest a stock’s share price can go. This is simply not true.

The value $0.0001 holds significance in the eye of penny stock investors because it is the lowest digit place that most brokerages will allow to be traded. Nevertheless even this can not be viewed as a practical bottom. Enter the dangers of the reverse split. A reverse split is an easy enough concept to understand: For every x amount of stock you own, you are now given y amount of stock (where X>Y) as the share structure is equally cut by a specified ratio. For instance, if you had 1000 shares of ACME Inc. that underwent a 1:10 reverse split, you will end up with 100 shares of ACME Inc. even though the value of those shares have not effectively been changed.

However, the dangers of this shifty maneuver are not in the action itself. A split of any kind will never change the inherent value of that stock (for all intensive purposes - we can talk about protected preferred shares another time). The dangers of this maneuver (aside from the affected shareholder sentiment that reacts to the announcement of a reverse split) is in the likely subsequent action of the company. A company that feels like it needs to reverse split typically has the intention of further diluting the stock once again in order to raise capital. Going back to our example of ACME Inc., pretend that the share price was originally $0.10. After the effective 1:10 split, the share price now becomes worth $1.00. This is a more respectable share price to the psychology of the shareholder despite the fact that the value of the stock has not inherently changed.

It is rare for a company to decide to reverse split its stock without having the intention of later diluting it. One possible reason in which this might take place is when a company needs to hit a certain price to retain its listing on a certain exchange. Another reason is that a company might merely want a more respectable share structure (a few million shares instead of a few hundred million shares). Yet for the most part, reverse splits are never as innocent as these scenarios. Often, these might even be used as the masking reasons behind the true intentions of the company.

Reverse splits are common on the lower exchanges. Many companies end up diluting there stock so much that the original price of the company’s stock may appear to have been worth hundreds if not thousands of dollars at one point in time. Typically, it’s a good idea to avoid companies that undertake reverse mergers entirely. Companies that are the product of a reverse merger (that might have included a reverse split) are a different story entirely. We will talk more about this another day.

Death of a Company

The Pink Sheets are often viewed as the birthplace of new companies, where concepts meet public capital in an intricate process of implementation. Often these companies are spawned into public life out of the shells of companies with broken pasts through a reverse merger process. Yet as in every circle of life, there must be death before there is life. In regards to the Pink Sheets, it should be viewed as an open gateway between the life and death of public companies. There are the dying companies that have no future (many that have fallen from the graces of the upper exchanges after being delisted), the stagnant companies unable to clear the pink sheet gravity and will eventually die just as the former, and finally the undervalued gems with futures that can eventually clear the lower exchanges obstacles.

Not all companies on the Pink Sheets are in a transitive state. Well-known companies like Nestle (NSRGY.pk) and Heineken (HINKY.pk) call the Pink Sheets their home for instance. Yet for the most part, and for most people, the Pink Sheets will always be that high-risk zone where the rules of the game starkly change. Like a stigmata, the “.pk” brands companies with the degrading mark of instability, volatility, and a general sense of futility.

As another rule of thumb for penny stock investors (PSI), it is wise to stay away altogether from delisted companies. Companies that have failed to retain their spots on the upper exchanges are the fallen angels of the investment community. They carry momentum of a dangerous kind, as their futures are vague or perishing and the need to raise capital likely lurks around the corner. A wise PSI will fish in “safer” waters by trying to find companies that are new to the market, and yet not new as a company. Stop watching companies that have come to the Pink Sheets to die. After all, resurrections are a rare occurrence.

Pink Sheet Gravity

For some time now I have been referring to a phenomenon known as Pink Sheet Gravity that only exists on the lower exchanges. Roughly defined, pink sheet gravity is the market force that pulls down the share prices of the public companies listed on the OTC:BB and the Pink Sheets. It is likely the cumulative effect of several conditions varying from dilution of the company stock, the social environment of the lower exchanges, and the mysterious (but commonly blamed scapegoat) naked shorting process .

Pink Sheet Gravity is the most influential operational distinction between the lower exchanges and the upper exchanges (NYSE, NASDAQ, AMEX, etc). From a historical standpoint, the stock market (upper exchanges) has maintained a steadily growing upward momentum over the long run. Were one to look at a comparable study at the lower exchanges, we would see a trend very much in the opposite direction.

It is for this reason that investing on the lower exchanges has always been an avoided practice. Like putting coins in the slot machines of several casinos, diversifying a portfolio on the lower exchanges leaves the odds of long-term success low in your favor. Yet with meticulous research, comprehension of the lower exchanges, and self-control, choosing the companies that can succeed in beating the house can be reduced to an informal “science”. Just as well-known poker players annually find their ways back to the final tournament table, a penny stock investor who knows the game is likewise able to overcome the Pink Sheet Gravity through the undervalued companies primed for take-off.

Diversification Overkill

The number one rule that every investor knows is to “diversify your portfolio.” It couldn’t make more common sense than if Mr. T himself were to jump out from around the corner and say it as it is. Diversifying one’s portfolio makes perfect sense as the only effective tool to soften the blow of losses in a dangerous market. Yet diversification can also serve as a Trojan horse when it comes to the pink sheets, where penny stock investors (PSI) come to apply the rules of the game they’ve learned from trading on the upper exchanges.

From a practical standpoint, it is wise to invest only a certain percentage of your portfolio into penny stocks (NEVER invest your entire portfolio into penny stocks). This is an intelligent form of diversification. Penny stocks must always be considered speculative, and it is wise to dip your hands across the risk spectrum for a balanced portfolio fit for you. However for the fool who ignores this advice, diversification entirely on the lower exchanges will NOT mitigate your losses more so than investing into a few companies.

For the unfortunate fool who finds himself heavily invested in penny stocks, diversification results in a capturing of the lower exchange market as a whole. Yet unlike the upper exchanges, we have already established that the lower exchanges are hindered by the pink sheet gravity. Diversification on the lower exchanges results in the downward momentum of your portfolio.

Proper commitment to the procedure of research and confirmation will give way to proving that some lower exchange companies stand high above the rest in regards to their inherent value to the industry. Out of the amount you’ve set aside for penny stocks, invest heavily in these companies at the ideal times.

As a rule of thumb, whenever possible, aim to try to own at least 1/10,000^th of the company’s outstanding common stock. Depending on how wealthy you are, this fraction can vary accordingly. When considering that decent money on the upper exchanges will tend to buy you a fraction in the 1/100,000^th to 1/1,000000^th range, it is wise to exploit the advantage of the lower exchange market – low market capitalizations. If you find that your investments in your portfolio are nowhere near accomplishing this fraction, consider tightening the amount of companies you’re invested in.

The Funky Friday Rundown (8/10/2007)

(Note: Every Friday [I do not post on Saturday or Sunday], I am going to do a short commentary about some of the more popular penny stocks of the past week listed on Investors Hub. These are NOT recommendations... just some thoughts. )

1) Phoenix Associates Land Syndicate (PBLS) -- As of right now 3:25am, I’d say that the 1^st round of anxious profit-taking is done and the second round of accumulation is coming around. HUGE contract, pay attention to this company.

2) Panamersa Corporation (PNMS) – CEO Mike Terell left, or did he? Personally it seems like his “departure” would mean he’s more committed to the company by getting further involved… and that kind of devotion is a good thing in my books.

3) Deep Down, Inc. (DPDW) -- Oil’s expanding out to shore in the long run, and the price is only going up. This company’s got a likely future, but no comment on the short-run.

4) Franchise Capital Corp (FCCN) – Never been into auto parts myself, but there’s something to be said about the attention Aero’s been getting. I’m curious how profitable they can be.

5) Renewable Energy Resources, Inc (RENW) – Still seeing a lot more pain before the gain. I like the potential though. Huge jump for those who caught the bottom, but I got a feeling it won’t be the last time we see it there.

Research and Confirmation

As two sides of the same coin, the practices of research and confirmation are two reliable techniques to sound penny stock investing. Without them, you are flying high above the Atlantic without lights or radar. For down here in the lower exchanges, nothing can be taken at face value. Here you will find dirty stories that sound like fiction… and sometimes they might just be that. Then there are also those instances in which you might hear little at all, and left to fill in the dots. The lack of transparency requirements and big brother watching over the shoulder of each company often results in a lesser degree of obligation to the shareholder when compared to companies on the upper exchanges. Such freedom on the company’s part leads to exploitation to some or lack of regard by others.

On the lower exchanges, every good shareholder must attempt to piece together a story that exists beyond the Press Releases. The story involves how the company has come together, what its current purpose is, and what its direction is. More importantly, it is critical to establish why it is you believe that this story is validated. External confirmation is the more supportive evidence towards a successful story. Whether this be in the form of contracts formed with other companies or a guy driving past a factory to confirm its operational, external confirmation is the glue that binds the story together.

As a reminder, it is important to remember that external confirmation by itself will typically never validate the entire story but a specific part of it. There will always be judgment call needed into believing any story. If you are not actively looking into the story of a company alongside reading the PR’s, you are setting yourself up for a more dangerous situation by numbing your investing senses.

Patience is a Virtue

“Patience is a virtue...”

The old slogan is beaded with wisdom when contrasting the trader to the investor. Patience is the defining factor that distinguishes between the two. It is the missing element that weighs a sizeable return upon the company’s progress rather than the sentiment of those following it. Above all, it is the most elusive characteristic of the penny stock investor (PSI).

What patience means:

• Patience means avoiding to execute trades on volatility.

• Patience means retaining a likely futuristic outlook of the company.

• Patience means enduring non-crimpling obstacles to the company.

What patience does not mean:

• Patience does not mean blindly holding onto a currently overvalued stock.

• Patience does not mean reacting to rumors before proof.

• Patience does not mean justifying a progress-crimpling obstacle as a non-event.

The Story Beyond the Press Release

I recently watched a documentary about North Korea. It dwelled upon the puppet population that today has found itself brainwashed and strictly controlled by the military state. In a nationwide effort to save face to the world, those in control have made several efforts to deceive and protect their nation’s image through elaborate facades. Some of these ranged from the existence of fake cities along the 38^th parallel to the building of 40-story high-rises that in reality service fewer than a hundred people. Overall the documentary clearly portrayed an example of a dominant back story that operated contrary to the advertised public story.

In the same sense, investing in penny stocks will sometimes carry a similar model in which a back story (the non-publicized events/progress) will dictate the direction of the share price over the influence of the public story (ie. Press Releases, Conference calls, etc). Most of the time, such instances of this model are scams and deceptive companies that adversely hurt the shareholder. Such companies are the ‘North Koreas’ of the lower exchanges and are so rampant amongst the Pink Sheets that they tarnish the image of trading of penny stocks.

But every now and then… there are the odd outliers that serve as counter examples to the common trend. For these companies, the public typically knows very little of what’s going on as the company fails to press release its success for some reason or the other. Such companies are risks to take in themselves. Despite their positive trends, it is always a good idea to have full comprehension of what it is that is going on with the company and what it is that is driving the share price. Unless you are privy to such inner knowledge, it will always be advisable from this investor to stay away from such companies. Whereas it may seem profitable to follow the crowd, it only takes the one back story event unknown to yourself to leave you hanging dry as the upward trend collapses drastically. Get to know the story, or stay out.

Here are two examples of these oddities that have broken the stagnant trend of the lower exchanges in an unexplained upward trend. (OCTL is a research company that has very odd movement relative to the moderately successful news released to the public, and SRFDF is a major mining operation that has released very little information to justify the multi-bagger it has already become):

Trigger-Happy Jack

When the rubber hits the road, only the execution of the trade will matter when investing in penny stocks. Throw away all the research, the luck, the confirmation, and the whole shebang. If you don’t buy in at the right time or sell when the harvest is plentiful, you’re setting yourself up for a painful experience. Particularly noticeable in the pink land of the lower exchanges, entry and exit points require both a form of patience and resolve for the best possible outcome.

Penny stocks are inherently cheap. Yet ironically they typically trade on the same interval scale as those of the upper exchanges. Investors hate to trade on subpenny intervals (ie. $0.1234) when they’re not coerced to do so (they are forced to do so when a stock drops below a penny). Unfortunately, this also adds to the volatility of the trades. For example, an 8-cent stock will typically jump on a 12.5% gain or loss on a single tick.

Because of this, following a company’s trading patterns is a vital part of investing on the lower exchanges.

Does the company have low volume?

Is the company trading sideways or does it sink and rise regularly?

How does the stock react to certain news?

We’ll go into more of this another day, but in the mean time it is always useful to get a firm understanding of how people react in various market situations. I say this because down here on the lower exchanges, your peers are typically the ones that are able to fluctuate the share price. Here are just two noticeable trends to bear in mind when it comes to executing the trade:

1) People like to trade heavily in the morning on news -- It’s very common to have morning spikes on the release of news. If you miss the spike, but feel the trend will continue, have a little patience as the price will typically retract a bit within an hour as people profit-take or panic a little less after coming to their senses

2) If a deadline approaches, a trend will not continue up to that deadline – If a company is undervalued, do not expect it to obtain a representation of its expected value prior to hitting a deadline. Even while there is momentum, this will typically cut short a few days prior to the deadline and begin to trade sideways or sink.

The Funky Friday Rundown (8/3/2007)

(Note: Every Friday [I do not post on Saturday or Sunday], I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations... just some thoughts. )



1) West Point Capital Inc (WPNC) -- Potentially turned-sinner? I like the management, concept, and share structure. Undervalued on future value, but can the company truly meet its "financial guidance?"

2) Ifinix Corporation (INXR) -- This one still remains way too hazy to be a solid investment... get a brokerage signed on & then we'll see.

3) Panamersa Corporation (PNMS) -- No significant news in a long time leaves unhappy investors, but there has been a consistent trend of sideways trading... dare to look beneath the skin on this one? You either believe it or you don't. Win big or lose it all.

4) Phoenix Associates Land Syndicate (PBLS) -- Looking higher within a few weeks. The company's building a vertically-integrated empire, but is it coming at the costly expense of shareholders (dilution)? UPDATE (1pm): "The BIG news was released today! GO BUY at these undervalued prices! TA being ungagged, showing the company's opening up as well!"

5) Xechem International, Inc. (XKEM) -- Possible long term success, but we won't be seeing this take off anytime soon. Lets look back in a year.





Leave a comment on a stock you want watched.

Dodging the Head-Fake

There’s nothing like a good game of pick-up basketball with some friends on the local courts to feel great throughout the rest of the day. That is… unless you look like a fool on the courts. Sometimes, all it takes is a simple head-fake to mean the game as it catches you off-guard, committed, and vulnerable to the offensive attack.

In many ways, the Penny Stock Investor (PSI) will also find himself in such situations as shady companies throw head-fakes through their misleading press campaigns. Often this can lead to a game-over scenario by the time investors catch wind that something fishy is going down. Some companies will promise high quarterly growth rates and others will introduce promising technologies and markets. In each case, the goal of the company is to lead the investor into believing that the best time to invest in the company was yesterday. Inevitably, there is enough half-truth existent on the Pink Sheets to keep both the optimist and pessimist satisfied customers on the hopes of promising futures.

Learning to read a head-fake takes practice, but a practical step towards avoiding one can be as simple as finding safer investments that are easier to be confirmed externally. Some suggestions for “safer” investments:

1) Avoid the finance companies – bank loans, mortgages, credits, etc. If the company only deals with numbers (and lacks a hard manufacturing product), it is also more difficult to confirm the truth of the company words.

2) Selectively avoid the high-tech’s – Unlike the finances, the high-tech’s (companies that offer amazing technologies that can change their industries) are only to be avoided if they are unable to produce revenue within a short period of time (less than a year). If they’re still developmental, gaining acceptance and clearing regulations are road-blocks that hinder and handicap the company as a viable immediate investment.

3) Avoid the under-financed companies – Companies that will require larger expenses in the future will require larger cash flows if the initial financing is not in place. While this is typically difficult to discern, there is some good-judgment to be made regarding an expense model outlook. Under-financed companies will resort to diluting their stock when the need for cash arises.

4) Avoid the start-up company – Simple as that. Too much pain straight off the bat, way too little gain for a long time coming.

Trust in a Trust-free Zone

The typical (Penny Stock Investor) PSI is a lone wolf. He hunts alone, and is forced to survive on his own… (and is sometimes pushed to defend his dignity from the wife critiquing over his shoulder).

With the invention of the internet, a new battlefield dynamic has emerged to the aid and woe of the investor. Internet forums have become a modern phenomenon as a channel of interlocution between PSI’s. Suddenly the PSI is thrown into a social world, allowed to operate amongst like-minded lone wolves in a pack mentality. He becomes a soldier for a common cause, but trapped behind the necessary cliché of “always looking out for number one.”

Knowing who to trust is the key to a successful team. But in this world, there is never a means of truly knowing who to trust. Ultimately, it comes down to a weeding process of skimming the more loyal and dependable from the selfish, opinionated, and non-contributing majority.

Suggestions to effective weeding:

1) Ignore all company bashers – Even if they’re right about the company, a person who takes a negative stance against the company will never add to the insight that another person you can trust or yourself could easily contribute.

2) Take note of people who take time to write their entries – A person committed to knowing more about the company will often take time to write longer entries in order to be heard (this is not to say ignore those who don’t).

3) Take note of people who actively research – Has this person made a call that others hadn’t? Has this person taken a search a step farther than you? Watch the actions of these people.

4) Cautiously ignore people who overreact and/or flip stances – People who allow their sentiment to get the best of them will often be more dangerous to the cause in the long-run than they will be useful. Be careful with such people, but mindful of their good input.

5) Throw a bone – When possible, single out those you’ve been watching & privately throw them a bone to see if you can establish a closer network.

Some Popular Internet Forums dedicated to Penny Stocks:

InvestorsHub (Personally, this is the only forum I find to be the most useful.)
Investor Village
Silicon Investor
Raging Bull
Hot Stock Market