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 influencers with far-reaching audiences, carrying the risk of a “pump and dump”.
|Sl #||Name||Ticker||Last Close|
|1||Planet 13 Holdings Inc
|2||Electrameccanica Vehicles Corp||NASDAQ: SOLO||$10.20|
|3||Ageagle Aerial Systems Inc.||NYSE: UAVS||$2.94|
|4||Very Good Food Company Inc.||OTCMKTS: VRYYF||$3.26|
|5||Tilray Inc.||NASDAQ: TLRY||$6.68|
#1 Planet 13 Holdings Inc. (OTCMKTS: PLNHF)
Company Info: PLNHF is a vertically integrated cannabis company based in Nevada, with cultivation, production, and dispensary operations in Las Vegas. The company aims to build a recognizable global brand known for world-class dispensary operations and create innovative cannabis products.
Last Close: $5.13
Reason for the hype: The company completed its previously-announced bought deal financing for aggregate gross proceeds of C$2.88 million. PLNHF reported good performance from its current operations. The company’s Medizin dispensary is set to reopen soon.
Latest 10-k report: Not available
- The company’s financial reports are not available on SEC, which in itself, is a huge red flag.
- On analyzing the 2019 financial statements available on the company’s website, the company had reported a net loss of $6,658,333 for the year 2019. For 2018 too, the company has reported a loss of $10,723,704. The company is posting losses despite reporting revenue of $63,595,036 for the year 2019, and $21,166,755 for the year 2018.
- Based on the recent corporate insider activity of 28 insiders, corporate insider sentiment is negative on the stock according to TipRanks.com. This means that over the past quarter there has been an increase of insiders selling their shares of PLNHF compared to earlier this year, indicating that executives believe the company and its stock price may underperform in the future.
- The Company has pending construction commitments outstanding of $4,516,513 as of 2019, related to the Phase II build-out of the Company’s Planet 13 cannabis entertainment complex. These are expected to be fulfilled before December 31, 2020.
- Despite losses, the compensation for the company director and company management increased year over year. In 2019, a total of $4,786,367 ($1,526,638+$3,259,729) was paid for management, and $407,598 for the company director.
- The company is not listed in major exchanges, indicating that it does not meet the rigorous standards required for listing.
- Charts indicate a supply area, as there were multiple long-wicked candles formed. The stock had also formed a high-volume bearish candle and was not able to cross above that level since then.
#2 Electrameccanica Vehicles Corp (NASDAQ: SOLO)
Company Info: Electrameccanica Vehicles Corp Ltd is a designer and manufacturer of electric vehicles. The company builds the all-electric SOLO, a single passenger vehicle, and Tofino, a two-seater electric roadster sports car. Its operating segment includes Electric Vehicles and Custom build vehicles.
Last Close: $10.20
Reason for the hype: The continuation of the EV bubble into 2021 due to the president-elect’s pledge to invest $2 trillion into EVs and other green initiatives., SOLO’s good third-quarter results.
Latest 10-k report: https://sec.report/Document/0001104659-20-038278/ (Form 20-F)
- The company is posting increasing losses YoY. According to the 20-F – Annual and transition report of foreign private issuers, the company generated a net loss of $30,742,311 for the fiscal year ended December 31, 2019, bringing the accumulated deficit to $62,116,008. $10,038,145 was the loss for the corresponding period in 2018. The company says that it anticipates generating a significant loss for the current fiscal year. This has been a loss-making company.
- SOLO is not eligible for the federal tax credit for electric vehicles (EVs) because its three wheels technically make it a motorcycle. For the same reason, it will only be eligible for a $750 state tax credit in California, versus $2,000 for other electric cars. This could cut into its overall revenue.
- The cost of SOLO, on average, is $18,500. History shows that tiny cars like the Solo don’t sell well in America.
- The Company began trading on Nasdaq only on August 9, 2018, and before that it had been trading on the OTCQB since September 2017. Importantly, from October 2017 until August 2018, the company’s common shares were quoted on the OTCQB as “thinly-traded”. This could potentially repeat, in which case the investor may be unable to sell at or near ask prices or at all to liquidate the shares.
- Despite the company making losses, for 2019, total compensation for the company’s CEO was $3,947,516, for the CFO was $2,252,492, and the CAO was $1,649,740.
- Many of the company’s patents are yet to be approved. As of March 25, 2020 the company has ten issued design registrations, two pending design applications, and 16 pending invention patent applications internationally.
- The charts indicate the formation of a bearish Harami pattern, as well as the formation of a long-tailed candle. All these are possible bearish indications.
#3 Ageagle Aerial Systems Inc. (NYSE: UAVS)
Company Info: AgEagle Aerial Systems Inc is a provider of drone imagery data analytics for the precision and sustainable agriculture markets. It designs, produces, distributes, and supports technologically-advanced small unmanned aerial systems (UAVs) that it offers for sale commercially to the precision agriculture industry.
Last Close: $2.94
Reason for the hype: The company announced record financial results for the three and nine months ended September 30, 2020; signed a partnership with Valqari to manufacture drone delivery stations; and was selected to participate in the unmanned aircraft pilot program in Kansas, increasing orders for unmanned aerial vehicles amid the coronavirus crisis.
Latest 10-k report: https://sec.report/Document/0001575705-20-000043/
- The company reported a net loss of $2,522,694 in 2019. This represents a $443,011 increase over the company’s net loss of $2,079,683 in 2018. This is despite recording a revenue of $296,677 during the year ended December 31, 2019, compared to revenues of $107,813 for the same period in 2018, a 175% increase.
- Despite posting losses, the executive compensation for the company’s CEO nearly doubled from $150,610 in 2018 to $331,547 in 2019.
- The current hype is based on the partnership with someone that the company will identify only as a “major e-commerce customer.” This appears to be a ploy for boosting the company’s prices. Even though it had been widely rumored to be Amazon, a spokesperson for the online retail giant had confirmed that it did not have a partnership with AgEagle in October.
- Successful technical development of the company’s products does not guarantee successful commercialization as there are stringent norms for regulatory approvals for their use. Moreover, the company operates in a field wherein there are rapid technological changes. The company needs to keep pace with technological developments and timely address the increasingly sophisticated needs of the customers to remain relevant.
- The charts show that the company had formed a strong bearish candle during mid-November. The stock was not able to cross above this level since then. This is a possible bearish sign.
#4 Very Good Food Company Inc. (OTCMKTS: VRYYF)
Company Info: The Very Good Food Company Inc is a Canadian plant-based foods company that designs, develops, produces, distributes, and sells a variety of plant-based meat and other food alternatives. VRYYF was formerly known as The Very Good Butchers Inc.
Last Close: $3.26
Reason for the hype: Increase in demand for plant-based protein alternatives due to the pandemic; signing of agreements for two North American-based production plants – one based in California and the other in Vancouver, BC.
Latest 10-k report: Not available in SEC
- According to the Annual report listed in otcmarkets.com, the company has posted increasing losses YoY. The company reported a net loss of $ 2,341,544 in 2019. In comparison, the net loss for 2018 was $398,722.
- The company is not listed in major exchanges, indicating that it does not meet the rigorous standards required for listing.
- The stock’s price was manipulated earlier, by paying YouTubers to promote the company for payment. The IIORC had to step in and in its response, the company issued a press release in which it deflected blame to its marketing company. This led to a hit to the company’s reputation.
- The company is relatively new with an unproven management team. It had already had supply chain issues earlier this year, which had caused a 6-8 weeks delay.
- Despite signing the agreement for two production plants, production will not begin until late next year. This delay could cause customers to look for other competitors. The current accelerated demand is due to the pandemic, so the hyper-growth rates could subside soon.
- The charts show that there is a supply area nearby for the stock. The stock had formed a long-tailed candle and was not able to cross above that level since then.
#5 Tilray Inc. (NASDAQ: TLRY)
Company Info: Tilray, headquartered in Nanaimo, Canada, cultivates and sells medical and recreational cannabis through a portfolio of brands that include Canaca, Dubon, and Manitoba Harvest. The company also sells CBD Products in the U.S. and exports medical cannabis globally from its production facilities in Canada and Portugal. Tilray also has a joint venture partnership with AB InBev to develop cannabis-infused drinks.
Last Close: $6.68
Reason for the hype: The potential of marijuana reform hitting the US under a Joe Biden presidency and the passing of legalization initiatives in states like New Jersey and Arizona.
Latest 10-k report: https://sec.report/Document/0001564590-20-008211/
- The company began operating in 2014 and is yet to generate a profit. TLRY reported increasing losses YoY. Tilray had net losses of $321.2 million, $67.7 million, and $7.8 million for 2019, 2018, and 2017, respectively. The company’s accumulated deficit is $430.1 million as of December 31, 2019. This shows its poor financial position.
- It is a tough competitive landscape in the field of Cannabis, with peers and existing U.S. growers. Pot is still illegal at the federal level. Cannabidiol, or CBD, is legal in the states. However, so far, Tilray does not show promise to be a strong competitor if recreational marijuana becomes legal in the U.S.
- The rally powered by post-election euphoria has already lost its steam and looks ready for further decline. Stifel has already downgraded the stock to ‘Sell’.
- The 10-k report does not list the company’s executive compensation. This lack of transparency is a red flag.
- The company’s business is heavily concentrated on a few customers. Two customers accounted for 13% each of revenue for the year ended December 31, 2019. One customer accounted for 24% of revenue for the year ended December 31, 2018.
- Unforeseen headwinds have led international sales to decline quarter-over-quarter. This stalling momentum in international markets could significantly impact the current bullish thesis for the stock.
- The company has multiple ongoing legal proceedings. On February 21, 2020, 420 Investments Ltd., as Plaintiff, had filed a lawsuit against Tilray Inc. On February 27, 2020, stockholders Braun and Noorian had filed a class action and derivative complaint against Tilray as a nominal defendant.
- Charts show that the stock had formed a high resistance area, with a long-tailed high-volume candle, followed by a big bearish candle. This is a possible bearish sign.
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!
Trades of the Day Research Team