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 | American Battery Metals Corp | OTCMKTS: ABML | $1.28 |
| 2 | ITM Power plc | OTCMKTS: ITMPF | $8.61 |
| 3 | Genius Brands International Inc. | NASDAQ: GNUS | $1.43 |
| 4 | CBAK Energy Technology Inc | NASDAQ: CBAT | $6.60 |
| 5 | Trevena Inc. | NASDAQ: TRVN | $2.12 |
#1 American Battery Metals Corp (OTCMKTS: ABML)
Company Info: American Battery Metals Corporation, currently in the process of changing its name to American Battery Technology Company, is an advanced extraction and battery recycling technology company with extensive mineral resources in Nevada. The company is focused on its lithium-ion battery recycling and resource production projects in Nevada, with the goal of becoming a substantial domestic supplier of battery metals to the rapidly growing electric vehicle and battery storage markets.
Website: https://americanbatterytechnology.com/
Last Close: $1.28
Reason for the hype: The company achieved three critical milestones for its pilot lithium-ion battery recycling plant in Fernley, Nevada – purchase of Pilot Factory Land, securing water rights, and hiring design contractor; the news about working on the development of a new extraction process; hiring of former Tesla executive Ryan Melsert as its CTO; and an overall surge in electric vehicle stocks and renewable energy.
Latest 10-k report: (transition report) https://sec.report/Document/0001078782-20-000720/
Red Flags:
- AMBL had incurred a net loss of $13,318,408 for the nine months ended June 30, 2020, compared to a net loss of $12,625,204 for the twelve months ended September 30, 2019. Meanwhile, the Company did not record any revenues from operations during this time period.
- Despite the lack of revenue and increasing losses, the executives were paid approximately $5.5 million as compensation (which included Salary, Bonus, and Stock Awards) for the years 2019 and 2020.
- As of June 30, 2020, the Company had a working capital deficit of $4,727,912 compared to a working capital deficit of $4,822,170 as of September 30, 2019.
- The company is planning to change its name from American Battery Metals Corporation to American Battery Technology Company. This is the third name change in just two years, as AMBL was earlier known as LithiumOre Corp, a wholly-owned subsidiary of Oroplata Resources Inc. Such frequent name changes without strong valid reasons are usually a red flag.
- The company’s CEO, Douglas D. Cole was charged with securities fraud in 2014. Board member Doug Maclellan has also been sued for securities. In addition to questionable ethics, they have minimal, if not zero, experience with mining, or battery technology.
- The company had recently raised an additional $1.45 million from an offering of preferred stock at a fixed price of $0.125 per common share equivalent, closing a total private placement financing of $2.7 million under the preferred-share offering.
- William Hunter, part of the company’s BOD sold 20k shares recently.
- There are rumors that potential investors had checked the company’s registered address on yahoo and found it to be a Post Office box at Incline Village.
- The current hype is based on the company working on getting permission from the City and from the NDEP (Nevada Department of Environmental Protection) with regards to the construction of the pilot plant. However, this is a very long process and need not necessarily be successful.
- The bottom line remains that although the company’s eventual objective is being a producing mineral company, so far, it has a limited operating history, has no patents, no revenue, and no pilot plant yet.
- The monthly chart shows that ABML had formed a double top pattern with long tail, and was not able to cross above that level.
#2 ITM Power plc (OTCMKTS: ITMPF)
Company Info: The company is a British manufacturer of polymer electrolyte membrane electrolyzers for hydrogen production via electrochemical splitting of water into hydrogen and oxygen. ITM Power PLC manufactures integrated hydrogen energy solutions, that meet the requirements for grid balancing and energy storage services, and for the production of clean fuel for transport, renewable heat, and chemicals.
Website: https://www.itm-power.com/
Last Close: $8.61
Reason for the hype: The news of company’s 24MW electrolyser to be installed at the Leuna Chemical Complex in Germany; partnership agreement with Optimal Group Australia; EUR 5m granted to ITM Power consortium for offshore hydrogen project
Latest 10-k report: https://www.itm-power.com/images/ITM_Power_Annual_Report_2020_-_281020_-_final_v3.pdf
Red Flags:
- The company reported increasing losses year over year, with a £29.4m loss from operations in 2020 compared to a £9.3m loss in 2019.
- The company is not listed in major exchanges, indicating that it does not meet the rigorous standards required for listing.
- The company reported total revenue and project grant funding of £5.4m in 2020 compared to £17.5m in 2019, which is a 69% decline.
- Net debt as of 30 April 2019 was £5,173,000 which jumped to £33,393,000 as of 30 April 2020.
- Despite all this, the salary of company executives increased year over year, and the company Directors also received a special bonus of 33% of their salary.
- Renewable hydrogen will need lots of support – political, regulatory, and financial — especially early on and would need policies in place to make it more economically viable. ITM has been experiencing difficulties in obtaining grant funding from the EU. So, the revenue generation may be depressed due to Brexit, unless the UK government soon makes up for the lost grant income.
- Although the opening of a new factory in Sheffield will increase ITM’s production capacity, this transition could take years and would not be painless.
- The company would be able to leverage the global energy systems’ adoption of green hydrogen only if it succeeds at reaching commercially viable unit costs. This is still a long way off, as experts see the energy transition speeding up only after 2030 when renewables reach sufficient scale to take over the power grid.
- The current surge is caused due to the recent partnerships. However, these events, discounted back to present value, have already been fully priced in by the market.
- There are competitors like McPhy and Nel Asa, which have advantages like business scale and a European domicile.
- The daily chart of ITMPF is shown below.
#3 Genius Brands International Inc. (NASDAQ: GNUS)
Company Info: GNUS is a kids’ media company. It is engaged in developing, producing, marketing, and licensing branded children’s entertainment properties and consumer products for media and retail distribution.
Website: www.gnusbrands.com
Last Close: $1.43
Reason for the hype: The news about a digital network formed by merging “Kid Genius Cartoon Channel” and “Baby Genius TV” and terming it free “Netflix for kids”
Latest 10-k report: https://sec.report/Document/0001683168-20-001032/
Red Flags:
- The company has been generating losses every quarter for almost 10 straight years. For the year ended December 31, 2019, GNUS generated net revenues of $5,907,899 and incurred a net loss of $11,481,245, while for the previous year, the company generated net revenue of $993,452 and incurred a net loss of $9,003,901.
- GNUS has heavy shareholder dilution – its share count has increased more than 52,000% in the past 10 years. Moreover, its share price is 98% below the price at which it went public
- The company has the risk of competition from the big media oligopoly.
- The company had surged from less than 50 cents to nearly $8.00, driven by the ‘Robinhood effect’. This has faded since then, and the stock gave up the lion’s share of its gains.
- The company has a history of short selling. A filling with the Securities and Exchange Commission had disclosed a number of investors in a March offering plan to sell some of their shares (possibly at enormous profits) in the very near future.
- The company’s highly recognizable show is Llama Llama. However, the company doesn’t own it, but licenses from the author of the popular books.
- The facts speak for themselves – Genius Brands did not have any consistent large source of revenue and wasn’t successful in delivering any content that’s generated meaningful economic value. On the contrary, it’s consistently generated negative operating and free cash flow. And the negative cash flow has gotten progressively bigger over time.
- The company had received notice from the Listing Qualifications Department of The NASDAQ Stock Market for lack of compliance with the NASDAQ Listing Rule 5550(a)(2) and faced the risk of delisting.
- The weekly chart of GNUS shows that it is currently trading below a high-volume candle which had previously caused the stock to climb higher. The stock had then formed an inverted hammer candlestick and the stock was not able to cross above it since then.
#4 CBAK Energy Technology Inc. (NASDAQ: CBAT)
Company Info: CBAK Energy Technology Inc is engaged in the manufacture, commercialization, and distribution of a variety of standard and customized lithium-ion high power rechargeable batteries which are mainly used in electric vehicles, light electric vehicles, electric tools, energy storage, uninterruptible power supply, and other high power applications.
Website: www.cbak.com.cn
Last Close: $6.60
Reason for the hype: The news that Chinese electric vehicle manufacturer NIO is considering the possibility of deploying cheaper lithium-ion phosphate batteries in the new models, which could be a major boost for companies like CBAK; and CBAT and JAC motors signing three years strategic agreement joint product development.
Latest 10-k report: https://sec.report/Document/0001213900-20-012125/
Red Flags:
- The company is being investigated for possible securities law violations. Hagens Berman’s investigation centers on whether CBAK Energy misled investors about the company’s battery technology and financial performance.
- As per the report from market analyst J Capital Research, “CBAT has all the hallmarks of a Chinese fraud. CBAT claims to be an EV company, but actually, it makes AA-size batteries for small appliances, and we contacted the auto companies CBAT claims are big clients, and they denied they do business with CBAT.” The report also concludes CBAK Energy artificially inflates the balance sheet with phony construction accounts and inflates 50% of its revenues through fake sales.
- There have been frequent changes in the company business type as well as the company name over the past few years. The company was formerly: CHINA BAK BATTERY INC (filings through 2017-01-13); and formerly: MEDINA COFFEE INC (filings through 2005-02-14).
- The company had received notice from the Listing Qualifications Department of The NASDAQ Stock Market for lack of compliance with the NASDAQ Listing Rule 5550(a)(2) and faced the risk of delisting.
- The company has ongoing lawsuits filed by three different companies, Shenzhen Huijie Purification System Engineering Co., Ltd; Dalian Construction Electrical Installation Engineering Co., Ltd.; and Dongguan Shanshan Battery Material Co., Ltd. In all three cases, the court ordered the freeze of certain amounts from CBAK Power’s bank deposits.
- The company had a substantial increase in the losses year over year. CBAT reported a net loss of $10.9 million and $2.0 million during the fiscal years ended December 31, 2019, and 2018, respectively.
- Despite reporting losses Year over Year, the company’s executive compensation has increased.
- The weekly chart of CBAT shows that the stock is trading near a major resistance area.
#5 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.
Website: www.trevena.com
Last Close: $2.12
Reason for the hype: The U.S. commercial launch for OLINVYK (oliceridine) injection which is touted to be superior to the premier pain relief drug in the world; and the announcement of many Pipeline catalysts.
Latest 10-k report: https://sec.report/Document/0001558370-20-002472
Red Flags:
- The company had incurred significant operating losses since its inception. The company’s net loss was $24.9 million, $30.8 million, and $71.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
- TRVN admits in the 10-k report that it not anticipating generating revenue from sales of products for the foreseeable future.
- The company’s drug is supposed to be priced around $15.00 per dose at least, to be profitable while also remaining competitive with the Morphine pain killer. The company also has major competitors (and peers) that include Arena Pharmaceuticals Inc. (ARNA) and AcelRx Pharmaceuticals Inc. (ACRX).
- Getting any new drug introduced into the medical community is typically a long-drawn-out process. Added to that, the covid-19 pandemic has caused a delay in the use of Oly in elective surgeries and is expected to continue to do so for a significant time period.
- In October and November 2018, the company’s current and former officers and directors were sued in three purported class actions filed in the U.S. District Court for the Eastern District of Pennsylvania alleging violations of the federal securities laws and claiming that the company made false and misleading statements regarding its business, operations, and prospects, including certain statements made relating to the End-of-Phase 2 meeting with the FDA, and certain statements concerning top-line results from the Phase 3 studies.
- The company’s CEO Carrie Bourdow recently sold shares worth a few hundred thousand. Such actions are usually a good indication the share price will be depressed moving forward for the foreseeable future.
- The price did not have a significant surge post-FDA approval, indicating the possibility that the value was already accounted for in the stock price.
- The company had a $50 million public offering of common stocks at lower valuations despite the company sitting on over $100 million in cash.
- The weekly chart of TRVN shows that sell-offs had occurred for the stock near the $3.60 levels and the stock would have a bullish bias above this level.
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!
Happy Trading!
— Trades of the Day Research Team