The allure of penny stocks lies in their potential to deliver massive gains in a short period of time.
But in exchange for that opportunity, penny stocks carry TREMENDOUS risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
How is this possible? For starters, the majority of penny stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In short, OTC-traded penny stocks don’t meet the rigorous standards required to trade on major exchanges like the NYSE, NASDAQ, and AMEX.
As a result, they can go largely “unchecked” and their financial condition can be extremely difficult to analyze. In the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment.
With this in mind, and to give you an idea of the kind of red flags to look for when you’re considering a penny stock, we’re taking a closer look at five of today’s most hyped penny stocks. These stocks are being touted by YouTube “influencers” with far-reaching audiences, carrying the risk of a “pump and dump”.
|Sl #||Name||Ticker||Last Close|
|1||Sunworks Inc||NASDAQ: SUNW||$3.36|
|2||Trevena Inc||NASDAQ: TRVN||$2.42|
|3||Nano Dimension Ltd – ADR||NASDAQ: NNDM||$4.32|
|4||Digital Ally, Inc.||NASDAQ: DGLY||$2.51|
|5||Ammo Inc||OTCMKTS: POWW||$2.35|
#1 Sunworks Inc. (NASDAQ: SUNW)
Company Info: Sunworks Inc provides photovoltaic based power systems for the agricultural, commercial, industrial, and residential markets in California, Oregon, Texas, New Mexico, and Nevada. It provides design, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring, and maintenance.
Last Close: $3.36
Reason for the hype: Compelling economic incentives, mandating by California that all new residential construction built post-2020 should have solar panels, signing of new business.
Latest 10-k report: https://sec.report/Document/0001493152-20-005238/
- Despite strong solar demand in the U.S. over the past few years, sales at the company have been steadily dropping ever since 2016, profit margins have eroded, losses have piled up, and the balance sheet has dwindled. SUNW stock dropped from $25 in early 2016, to just 29 cents earlier this year.
- As per the 10-k report, SUNW has been incurring annual operating losses since inception. The company has an accumulated deficit of $72,473,000 and $63,510,000 as of December 31, 2019 and December 31, 2018, respectively.
- The company’s revenue has been steadily declining. For the year ended December 31, 2019, revenue declined 15.7% to $59,830 compared to $70,965 for the year ended December 31, 2018.
- The Company has been reporting increased losses YoY. It had a consolidated net loss of $9,186 for the year ended December 31, 2019 compared to a net loss of $5,740 for the year ended December 31, 2018.
- Company has limited operating history, which makes it difficult to accurately evaluate the business and prospects. Even though the company was formed in January 2002, it did not begin selling solar systems until January 2014.
- The business is heavily dependent on the availability of rebates, tax credits, and other financial incentives. Any change in policies or competitive pricing can significantly impact the company.
- Business is heavily concentrated on certain regions (the vast majority of installations are in California and Nevada). The business model is also dependent on customer demand and weather. This increases the risk of disruptions for the company.
- On March 13, 2020, the company received notice from the Listing Qualifications Department of The NASDAQ Stock Market for lack of compliance with the NASDAQ Listing Rule 5550(a)(2). If continued, the company faces possible delisting.
- The CEO has a base salary of 600,000 while the interim CFO has a base salary of 202,000. The company’s revenue for 2019 was just $59,830.
- The company had a lot of layoffs due to COVID-19. In spite of signing new deals, this reduction in workforce could delay SUNW’s development efforts or otherwise harm their business in case they fail to deliver on time.
- The charts indicate a spike in the price, which was not sustained. This points to selling pressure.
#2 Trevena Inc. (NASDAQ: TRVN)
Company Info: Trevena Inc is an American biotechnology company. The portfolio pipeline is focused on medicines targeting pain management: TRV734: oral medicine for moderate to severe pain; TRV250: oral medicine for migraines; and TRV027: treatment for acute heart failure. Its leading product is oliceridine (TRV130), a protein-based chemical meant to manage moderate to severe acute pain.
Last Close: $2.42
Reason for the hype: Trevena had received FDA approval for oliceridine back in August. DEA has now classified oliceridine as a Schedule II controlled substance. OLINVYK is headed for commercial availability, likely by Q1 2021.
Latest 10-k report: https://sec.report/Document/0001558370-20-002472/
- The company has lackluster financials. As of December 31, 2019, TRVN had an accumulated deficit of $413.1 million.
- The company had incurred significant operating losses in the past few years. It had posted a net loss of $24.9 million, $30.8 million and $71.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
- The company has several litigations. Trevena was sued in three purported class actions filed in the U.S. District Court for the Eastern District of Pennsylvania, or the EDPA, alleging violations of the federal securities laws. In addition, five different shareholder derivative action was filed in the EDPA claiming breach of fiduciary duty, waste of corporate assets, violations of the federal securities laws, and unjust enrichment.
- The company had received notice from the Listing Qualifications Department of Nasdaq Market for lack of compliance with the NASDAQ Listing Rule 5550(a)(2). If continued, the company faces possible delisting.
- Although oliceridine has been approved, it is directly in competition with, OFIRMEV® (IV acetaminophen), marketed by Mallinckrodt plc, with EXPAREL® (liposomal bupivacaine), marketed by Pacira Pharmaceuticals, Inc., CALDOLOR® (IV ibuprofen), marketed by Cumberland Pharmaceuticals, DSUVIA™ (sublingual sufentanil nanotabs), marketed by AcelRx, and ANJESO™ (IV meloxicam), marketed by Baudax Bio, Inc. This could heavily limit the company’s possible profits.
- There has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. The elections and the change in the government could lead to healthcare reform measures that may prevent the company from generating revenue, attaining profitability, or commercializing its drugs.
- Charts indicate a strong resistance area is formed due to the formation of a double top pattern. The high-volume candles couldn’t cross above this level.
#3 Nano Dimension Ltd – ADR ( NASDAQ: NNDM)
Company Info: Nano Dimension Ltd is engaged in research and development of a three-dimensional printer that prints electronic circuit boards, also known as printed circuit boards, and ink materials and products based on nanotechnology. Its products consist of two main product lines – Dragonfly 2020 3D printer and proprietary ink products.
Last Close: $4.32
Reason for the hype: Nano Dimension Announced Sale of Two DragonFly LDM Systems for Additive Manufacturing of Electronics.
Latest 10-k report (form 20-F): https://sec.report/Document/0001213900-20-005813/
- The company has not achieved profitability and has sustained net losses in every fiscal year since inception. Since the date of inception, and as of December 31, 2019, the company has incurred net losses of approximately $60 million.
- The company has been financing its operations primarily through proceeds from issuance of Ordinary Shares and convertible notes. Stock dilution is not usually a good sign.
- The company’s operating loss for the year ended December 31, 2019 was $14,835,000, as compared to an operating loss of $15,150,000 for the year ended December 31, 2018. This was as a result of the foregoing.
- The company’s business makes it inherently difficult to operate without infringing on third party rights. This had previously led to litigation disputes involving the ownership of intellectual property. In 2015, a claim was filed in the District Court in Tel-Aviv Jaffa alleging that certain officers and employees misappropriated commercial secrets and technology while employed at a previous employer. Similar litigations could prove to be quite expensive and also divert management attention.
- The company is a foreign private issuer as defined by the rules under the Securities Act and the Exchange Act. This exempts the company from compliance with certain laws and regulations of the SEC and certain regulations of the Nasdaq Stock Market, and do not require to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies registered under the Exchange Act. All this makes it difficult to analyze the actual financials of the company.
- Charts indicate selling pressure as there were multiple long-wicked candles formed. There is also a strong resistance level nearby for the stock.
#4 Digital Ally, Inc. (NASDAQ: DGLY)
Company Info: Digital Ally Inc produces digital video imaging and storage products for use in law enforcement, security, and commercial applications. Its products are an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial fleets.
Last Close: $2.51
Reason for the hype: The company announced on October 22, 2020 that it entered Preferred Integrator Partnership with Integrated Openings Solutions (IOS) for ThermoVu™ Non-Contact Temperature-Screening Instruments.
Latest 10-k report: https://sec.report/Document/0001493152-20-005861/
- The company’s gross profit for the years ended December 31, 2019 and 2018 was $3,232,629 and $3,961,808, respectively, which is a decrease of $729,179 (18%). This is despite winning the patent litigation settlement of $6.0 million from WatchGuard.
- DGLY reported a loss before income tax benefit of $10,005,713 and $15,544,551 for the years ended December 31, 2019 and 2018, and decrease in cash of $3,239,122 to $359,685 for the year ended December 31, 2019. All these points to possible issues with the company’s management.
- The company was recently involved in lawsuit. PGA Tour, Inc. filed suit against the Company in the Federal District Court for the District of Kansas alleging breach of contract and breach of implied covenant of good faith and fair dealing relative to the Web.com Tour Title Sponsor Agreement on January 22, 2019.
- Executive, sales and administrative staff payroll expenses totaled $3,083,021 and $2,139,687 for the years ended December 31, 2019 and 2018, respectively, an increase of $943,334 (44%), which included the bonuses paid to executives during 2019. This was done despite the decline in the overall revenue.
- DGLY has been accessing the public and private capital markets to raise funding through the issuance of debt and equity to fund its operations. The management had noted that it expects to continue this pattern until it achieves positive cash flows from operations.
- The company has a debt of $8,327,748 as of December 31, 2019.
- Charts indicate a breakdown from a support level, which has now turned into a resistance are. This is usually a bearish sign.
#5 Ammo Inc. (OTCMKTS: POWW)
Company Info: AMMO Inc engages in the design, manufacture, and market ammunition products in the sporting industry in the United States. The company offers its products to a sport and recreational shooters, hunters, individuals seeking home or personal protection, manufacturers and law enforcement and military agencies.
Last Close: $2.35
Reason for the hype: The company announced the increase in its manufacturing capacity to aid in keeping up with the demand for its award winning patented STREAK™ Visual Ammunition line.
Latest 10-k report: https://sec.report/Document/0001493152-20-016303/
- The company is not listed in major exchanges, indicating that it does not meet the rigorous standards required for listing.
- POWW has been posting increasing losses. POWW ended the year ended March 31, 2020 with net losses of approximately $14.6 million compared with respective net losses of approximately $11.7 million for the year ended March 31, 2019.
- As of March 31, 2020, the Company had significant Federal net operating loss carry forwards for income tax purposes amounting to $29,459,502.
- The company is engaged in legal proceedings that could cause unforeseen expenses and could occupy a significant amount of management’s time and attention. A former employee had reported potential violations of SEC rules and regulations by management and that as a result of such disclosures, the former employee was allegedly subject to a hostile work environment.
- Even though the company has invested millions in new equipment, it may take a while before it can translate into increased production capacity. There is also an ambiguity in the company’s future growth due to the change in elected government. The new president-elect does have a record, and a plan, in favor of gun control.
- The charts indicate a strong resistance area for the stock, indicating a possible bearishness.
As you can see, there are quite a few red flags in these hyped penny stocks. We would advise investor caution before entering into such high-risk ventures. Remember to think before you trade!
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