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||Cinedigm Corp||NASDAQ: CIDM||$0.84|
|2||Fansunite Entertainment Inc.||OTCMKTS: FUNFF||$0.53|
|3||Peak Fintech Group Inc.||OTCMKTS: PKKFF||$1.09|
|4||Hexo Corp||NYSE: HEXO||$1.00|
|5||CloudMD Software & Services Inc.||OTCMKTS: DOCRF||$1.65|
#1 Cinedigm Corp (NASDAQ: CIDM)
Company Info: Cinedigm Corp is primarely in the business of services-video tape rental. It is a distributor and aggregator of the independent movie, television, and other short-form content. The company operates through two segments Cinema Equipment Business and Content and Entertainment Business.
Last Close: $0.84
Reason for the hype: Availability of Cinedigm’s Linear Channels across Sony PlayStation gaming consoles as well as Android TVs and iOS and Android Mobile Devices; 29% growth of revenue on the company’s ad-supported streaming channels from September to October 2020; and Cinedigm’s China play and partnership with Spherex aimed at accelerating Cinedigm’s international expansion.
Latest 10-k report: https://sec.report/Document/0001628280-19-008761/
- The 10-k report states that the company has incurred losses since its inception in March 2000 and has been financing its operations principally through equity investments and borrowings. As of March 31, 2019, the company had negative working capital of $48.8 million and a debt obligation of $43.3 million. The company had incurred consolidated net losses of $16.3 million and $18.5 million for the years ended March 31, 2019 and 2018, respectively. The company also reported an accumulated deficit of $395.8 million as of March 31, 2019. CIDM had recently reported a net loss of $14.7 million for fiscal year 2020. All these indicate that the company’s performance is still lacking.
- Despite making losses, the company’s CEO has been drawing a total compensation of $1,043,697, $1,555,509, and $1,182,061 for 2019, 2018, and 2017 respectively. In addition, the company has noted in the 10-k report that it may have excluded certain executive compensation tables from their disclosure.
- Covid-19 Vaccine news could be a headwind for the stock’s business model for the near-term because company’s user growth had skyrocketed thanks to the stay-at-home environment.
- Due to Covid-19 pandemic, Cinedigm’s legacy equipment business generated $12.5 million in revenue in 2020 and just $3.6 million in 2021, reflecting a combination of shuttered theaters and a sunsetting of the segment. If the corona virus continues to persist, it would leave the company light on cash considering their OTT streaming business is not yet cash flow positive and appears to be destined to hover around breakeven over the near-medium-term.
- Management has several promising initiatives but has so far demonstrated that it has limited bandwidth, headcount, and funding to necessarily go after every material opportunity. In addition, not enough focus on the core growth prospects or an unwise material investment could significantly impair the growth trajectory.
- The charts show that the stock is near a supply area, indicating bearishness.
#2 Fansunite Entertainment Inc. (OTCMKTS: FUNFF)
Company Info: FansUnite is a sports and entertainment company, focusing on technology related to regulated and lawful online sports betting and other related products. The principal business is operating the FansUnite Sportsbook and the McBookie website, offering online sports betting to the UK market. FansUnite is also a provider of technology solutions, products, and services in the global gaming and entertainment industries and looks to acquire technology platforms and assets with high-growth potential in new or developing markets.
Last Close: $0.53
Reason for the hype: The company inked distribution deal with an online casino games aggregator; announced plans to expand its current line from three games to twelve; and received approval from the Malta Gaming Authority, allowing FUNFF to be a betting platform supplier and casino operator in Europe; wholly owned subsidiary McBookie closed out October with the highest increase in monthly revenue and gross margin.
Latest 10-k report: Not available.
2018 Annual Report available in SEC, https://sec.report/otc/financial-report/262437
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing. In fact, it had only received approval to officially “uplist” from the Pink® market to the OTCQB Venture Market in October 2020.
- As of December 31, 2018, the Company reported a net loss of $3,255,384 (2017 –$478,691) and an accumulated deficit of $3,850,327. The Company did not have sufficient cash to sustain operations for the next twelve months without additional financing.
- Despite losses, in 2018, $95,000 (2017 – $60,000) was paid to the CEO, $95,000 (2017 – $60,000) to the COO, and $87,000 (2017 – $nil) to the CFO in salaries and benefits; and, – share-based payments with a fair value of $275,511 related to options granted to Officers and Directors of the Company.
- The company had reported no revenue or sales in 2018 and 2019, and the current surge points to characteristics of a very speculative penny stock.
- The company has a current ratio of 0.34, indicating that it has a negative working capital and may not be able to pay financial obligations in time and when they become due.
- The charts show that the stock is currently trading below a supply zone, with multiple long-wicked candles. This is a possible bearish indication.
#3 Peak Fintech Group Inc. (OTCMKTS: PKKFF)
Company Info: PKKFF is the parent company of a group of financial technology (Fintech) subsidiaries operating in China’s commercial lending industry.
Last Close: $1.09
Reason for the hype: The company recently closed a deal to create a joint venture with a large Chinese electronics wholesale distributor (Beijing Dianjing Company aka BDC) to use its platform to match lenders to its retail customers for funding their inventory purchases
Latest 10-k report: https://sec.report/otc/financial-report/251342
- The Company has been posting losses consistently. It had incurred a net loss of $1,830,361 for the year ended December 31, 2019 ($3,608,920 for 2018), it had reported an accumulated deficit of $23,623,949 as at December 31, 2019 ($20,914,779 as at December 31, 2018)
- Despite being a loss-making company, its key management personnel, the Chief Executive Officer and the Chief Executive Officer of the Chinese subsidiaries are members of the Board, and their remuneration for 2019 was $894,062 ($1,038,658 in 2018).
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- There are risks regarding the management of the default rate on its loans, the technical performance of its platform, repatriating funds back to Canada, and macro events such as the U.S.- China trade relations. There is also a risk of near-term dilution and/or refinancing from convertible debentures due in less than a month. All these point to possible decline in its price.
- Even though new supply chain customers had come onboard, they bought with them lower margins as these customers use outsourcing services such as invoicing, inventory management, warehousing and shipping for which Peak pays others.
- PKKFF is a Chinese company and according to the rules of that country, a company that does business in China must structure itself in a way so that earnings made in China can be repatriated back to the country of origin. This could impact the profit and stock price.
- The company has loans of which some are considered problematic at over 90 days overdue. The future growth trajectory of the company depends on Peak’s ability to manage its default rate.
- The charts indicate that the stock is forming a head and shoulders pattern, which is a strong bearish pattern.
#4 Hexo Corp (NYSE: HEXO)
Company Info: Hexo Corp is a consumer packaged goods cannabis company that creates and distributes innovative products to serve the global cannabis market. The Company serves the Canadian adult-use markets under its HEXO Cannabis, Up Cannabis and Original Stash brands, and the medical market under HEXO medical cannabis.
Last Close: $1.00
Reason for the hype: Q1 Revenue increased 9% sequentially to $29.5 Million, partnership with Molson Coors to form Truss Beverages, tailwinds from Joe Bidens US election victory, and four new states legalizing marijuana.
Latest 10-k report: https://sec.report/Document/0001193125-20-080940/
- The company is betting heavily on the success of CBD-infused beverage, Truss Beverages, for its future growth. The Canadian market is simply not large enough to enable the company to become profitable. To enter the black, they need the United States. However, its drinks are only available in Colorado in the U.S.
- The company is attempting to differentiate its brand by only selling flower with more than 20% THC. However, this branding strategy does not have staying power, nor is it expected to work in a mature market.
- The stock has not received much attention from analysts. Only two analysts have published ratings on Hexo. And their average price target for the stock was 80 cents.
- To avoid having its stock delisted, the company is set to undertake an eight-for-one or four-for-one reverse stock split in December. It is a common knowledge that a company’s share price rarely goes up after a reverse- stock split.
- The company’s Q4 fiscal year 2020 net loss widened by 279% compared to the same period last year.
- The company’s acquisition, Newstrike Brands was reported to be growing cannabis without a license. A company called MediPharm had also filed a lawsuit against Newstrike for unpaid bills. All these show the lack of optimized internal processes of the company.
- The company had incurred operating losses since commencing operations.
- The Company was named as a defendant in a securities class action that was filed in the Superior Court in the Province of Quebec and in two securities class actions that were filed in the U.S. District Court for the Southern District of New York. The alleged misrepresentations relate to the Company’s forward-looking information on the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing”, the Company’s supply agreement with the SQDC, and issues relating to the Company’s acquisition of Newstrike
- The chart shows the stock is currently bearish and would turn bullish only above a certain level.
#5 CloudMD Software & Services Inc. (OTCMKTS: DOCRF)
Company Info: The telehealth company offers SAAS based health technology solutions to medical clinics across Canada and has developed proprietary technology that delivers quality healthcare through the combination of connected primary care clinics, telemedicine, and artificial intelligence (AI).
Last Close: $1.65
Reason for the hype: acquisition of Snapclarity Inc., acquisition of Re:Function Health Group, increase in registered users due to the pandemic; and acquisition of healthcare navigation platform Medical Confidence Inc, as well as Canadian Medical Directory and employee health services company HumanaCare.
Latest 10-k report: <not available> https://investors.cloudmd.ca/wp-content/uploads/2020/08/2019-Annual-Financials.pdf
- The company was formerly known as Premier Health Group Inc. and changed its name to CloudMD Software & Services Inc. in February 2020.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The 2019 annual report shows that the Company had net loss of $4,717,859 during the year ended December 31, 2019, (December 31, 2018 – $2,683,362 loss) and as of December 31, 2019 had an accumulated deficit of $7,835,139 (December 31, 2018 – $5,181,243) which has been funded primarily by equity financings and loans from non-related parties. These factors indicate the existence of a material uncertainty.
- The company’s revenue decreased from $221,169 in December 31, 2018 to $59,462 in December 31, 2019. Q3 2020 total revenue was $3.4 million, with Net loss and comprehensive loss in Q3 2020 of $2.7 million.
- Despite incurring losses, the company had doubled the salaries paid to the CEO.
- The current increase in revenue was mainly attributed to the public health crisis of Covid-19. Therefore, the roll-out of Covid-19 vaccines could significantly impact the company’s future growth trajectory.
- The charts indicate that the stock has currently broken down from a head and shoulders pattern, which is a strong 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!
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