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 | Enzolytics Inc. | OTCMKTS: ENZC | $0.55 |
| 2 | Northern Dynasty Minerals Ltd | NYSE: NAK | $0.79 |
| 3 | Gran Tierra Energy Inc. | NYSE: GTE | $0.82 |
| 4 | Acasti Pharma Inc. | NASDAQ: ACST | $0.74 |
| 5 | McEwen Mining Inc. | NYSE: MUX | $1.07 |
#1 Enzolytics Inc. (OTCMKTS: ENZC)
Company Info: Enzolytics Inc is a biotechnology company. It is a drug development company committed to the commercialization of its proprietary proteins for the treatment of debilitating infectious diseases. The company’s pipeline products include ITV-2 Prenatal, ITV- 3 Pediatric, ITV-4 HIV Vaccine, and others.
Website: www.enzolytics.com
Last Close: $0.55
Reason for the hype: Enzolytics announced the discovery and patenting of eleven newly identified conserved target sites on the SARS-CoV-2 Virus (Coronavirus); the news that the in vitro study of the Company’s ITV-1/IPF peptide treatment that demonstrated the broad efficacy with low toxicity; and the official filing receipt from the United States Patent Office with regards to its multiple sclerosis patent application.
Latest 10-k report: https://backend.otcmarkets.com/otcapi/company/financial-report/268122/content
Red Flags:
- The company has a history of frequent name changes. On November 25, 2004, the Company changed its name to Falcon Media Services, Ltd from T&T Homes Limited. On November 12, 2008, the Company changed its name to Extreme Mobile Coatings Corp., Ltd. On March 2, 2009, the Company changed its name to Extreme Mobile Coatings Worldwide Corp. On May 19, 2010, the Company changed its name to Structural Enhancement Technologies Corp. On November 16, 2012, the Company changed its name to Eco-Petroleum Solutions, Inc. On March 22, 2018, the Company changed its name to Enzolytics, Inc. This is a red flag.
- The Company has incurred an operating loss since its inception. The company confirms in its Annual Report that the cash resources are insufficient to meet its planned business objectives. As of December 31, 2019, and December 31, 2018, the Company owed to Directors, officers, and stockholders of the Company $376,839 and $370,149 respectively.
- For 2019, the company reported zero revenue and a net loss of $734,708.
- The company is not listed in major exchanges like NYSE or NASDAQ, indicating that it does not meet the rigorous standards required for listing
- The company had executed a letter of intent with BioClonetics Immunotherapeutics, Inc. BioClonetics was in the final stage of development of a parent monoclonal antibody (“mAbs”) which is non-toxic and has shown in initial in vitro testing to be effective against more than 95% of all strains and viral subtypes of HIV-1 against which it has been tested. ENZC no longer use monocle antibody for the HIV, and are using TV1 experiment from BioClonetics (based in Bulgaria) and seems to be attempting to use European Medicines Agency (EMA) to bypass FDA.
- The company is rife with risks. There is competition in their focused HIV cure market space. It is also deemed likely they would offer more shares and dilute share price to raise capital to build production facilities.
- The fact remains that there is a lot of work to be done to further prove the product, acquire funding, do more testing, solidify patents, work on FDA compliance, find production partner, or perhaps attract a buyer or major Pharma merger.
- The daily chart shows that the stock has been forming a pennant pattern, and recently formed a supply candle.
#2 Northern Dynasty Minerals Ltd (NYSE: NAK)
Company Info: Northern Dynasty Minerals Ltd is a Canadian mineral exploration company. It has a single operating segment of acquisition, exploration, and development of mineral properties. Its core asset is the Pebble Project located in Alaska, USA. The Pebble project is seeking to develop a significant deposit of copper, gold, molybdenum, and silver into a modern mining operation.
Website: www.northerndynastyminerals.com
Last Close: $0.79
Reason for the hype: News that Corps of Engineers accepted the Pebble Partnership’s request for appeal (RFA)
Latest 10-k report: https://sec.report/Document/0001493152-20-005442/
Red Flags:
- According to the 40-F report, NAK is a loss-making company. The Company had incurred a consolidated net loss of $69 million during the year ended December 31, 2019 (compared to a net loss of $16.0 million in 2018). The Company had a working capital deficit of $0.2 million and the consolidated deficit was $556 million. The company notes that these conditions raise substantial doubt about its ability to continue as a going concern.
- Northern Dynasty does not have any operating revenue, although currently and historically it has had non-material annual interest revenue as a consequence of investing its surplus funds.
- A securities fraud class action was filed against the company alleging that Northern Dynasty and senior executives misled investors about the viability of the company’s proposed Pebble Project. On Aug. 24, 2020, the U.S. Army had announced the Pebble Project would significantly degrade the environment, result in significant adverse effects on the aquatic system or human environment, and as proposed cannot be permitted.
- The current hype is due to the corps of engineers accepting the company’s RFA. However, only if Army Corps of Engineers changes its stance, will share prices surge. Depending on which way the decision lands, the movement of the shares is expected to be extreme.
- Pebble is NAK’s lone project and most of the company’s future depends on the outcome of the class action and the answer to the company’s appeal from the Army Corps of Engineers. Without any inside view to the appeal process, Northern Dynasty is a speculative investment right now.
- The weekly chart shows the proximity to multiple gap resistance levels.
#3 Gran Tierra Energy Inc. (NYSEAMERICAN: GTE)
Company Info: Gran Tierra Energy is an independent energy company engaged in the acquisition, exploration, development, and production of oil and gas properties in Colombia. The company produces primarily light crude oil, supplemented with medium crude and natural gas. Production averaged 35,300 barrels of oil equivalent per day in 2018, and the company estimates that it holds approximately 142 million boe of proven and probable crude oil and natural gas reserves.
Website: www.grantierra.com
Last Close: $0.82
Reason for the hype: The need for building infrastructure for the green energy future pushing up short-term demand for oil products (for construction activity); increase in demand for oil after the covid-19 shut downs; and market moving up due to the passing of a 1.6 trillion dollar stimulus package.
Latest 10-k report: https://sec.report/Document/0001273441-21-000007/
Red Flags:
- Gran Tierra Energy insiders own 2.4% of the company, worth about US$5.8m. Institutional holders control 39.79%, with the float percentage being 40.57%. Overall, this level of insider ownership isn’t that impressive, as high insider ownership often makes company leadership more mindful of shareholder interests.
- The company’s net loss in 2020 was $778.0 million or $(2.12) per share basic and diluted, which included a non-cash ceiling test and inventory impairment of $564.5 million and goodwill impairment of $102.6 million, respectively, compared to net income of $38.7 million, or $0.10 per share basic and diluted in 2019.
- The company has been severely impacted by the COVID-19 pandemic and the related crash in world oil prices.
- The company has significant debt. Gran Tierra has $786.6 million of long-term debt and a further $86.5 million of asset retirement obligations and tax liabilities. Most companies with significant debt cannot allow production to fall too low or they will not have enough cash flow to benefit from a pricing recovery in the future. Yet, Gran Tierra had recently shut in some wells. Also, industry needs to operate with a debt ratio closer to one so that under current conditions there are no worries about violating debt covenants.
- GMT Capital Corp is the largest shareholder of the company, and has been selling large amounts of shares of GTE every day, and is expected to continue to do so for the next two weeks. This could result in a decrease in the price of GTE.
- Gran Tierra had to apply for debt covenant relief which it received from its syndicate of lenders at the start of June.
- Transandino pipeline, which carries 85,000 barrels of oil daily to the Pacific coast port of Tumaco, is an essential element for transporting the crude produced by Gran Tierra in Putumayo. This was attacked multiple times by the ELN and FARC dissidents. Outages of the Transandino pipeline will cause Gran Tierra’s oil sales and production to fall further impacting earnings.
- The bottomline remains that the company has economic headwinds, growing concern over its financial position, and is vulnerable to security risk (like the farmer’s blockade in the southern Putumayo department) and geopolitical risk in Colombia. Weak oil prices and deteriorating production has caused earnings to plunge, makes it uncertain that Gran Tierra can meet its operational and financial commitments. All these make GTE a risky investment.
- The weekly chart of GTE is shown below
#4 Acasti Pharma Inc. (NASDAQ: ACST)
Company Info: Acasti Pharma Inc is a biopharmaceutical innovator advancing a cardiovascular drug, CaPre (omega-3 phospholipid), for the treatment of hypertriglyceridemia, a chronic condition affecting an estimated one third of the U.S. population. The company is focused on addressing a critical market need for an effective, safe, and well-absorbing omega-3 therapeutic that can make a positive impact on the blood lipids associated with cardiovascular disease risk. The Company is developing CaPre in Phase 3 clinical program in patients with severe hypertriglyceridemia.
Website: www.acastipharma.com
Last Close: $0.74
Reason for the hype: Growing optimism about its earnings prospects; news about developing CaPre in Phase 3 clinical program in patients with severe hypertriglyceridemia; and B.Riley FBR upgrading the stock from Neutral to Buy; news that EB-101 gene therapy for recessive dystrophic epidermolysis bullosa is currently in a Phase III trial; and general reaction to the company’s quarterly results.
Latest 10-k report: https://sec.report/Document/0001171843-20-004613/
Red Flags:
- ACST is a loss-making company. Acasti has incurred net losses for the fiscal year ended March 31, 2020 of $26.3 million and $39.3 million for the fiscal year ended March 31, 2019. As of March 31, 2020, the company had an accumulated deficit of $129.4 million.
- The company has been at the risk of getting delisted from NASDAQ. On February 28, 2020, the company had received written notification from the NASDAQ Listing Qualifications Department for failing to maintain a minimum bid price of $1.00 per share for the preceding 30 consecutive business days, as required by NASDAQ Listing Rule 5550(a)(2) – bid price.
- Despite reporting losses every year, the executive compensation increased year-over-year, with President and CEO drawling $2,186,347 for 2020 (compared to $925,555 in 2019), and the COO drawing $947,604 in 2020 compared to $419,703 in 2019.
- The company was developing a krill-oil derived prescription drug called CaPre to treat hypertriglyceridemia. The TRILOGY 2 study on CaPre failed to meet its primary endpoint. Yet, the company still went ahead with analysis of its TRILOGY 2 Phase 3 trials of the drug CaPre in patients with severe hypertriglyceridemia and reported that triglyceride reduction in those with HTG was one of the largest seen in any conducted triglyceride reduction trial. However, phase 3 clinical trials failed to outperform the placebo drug, resulting in a 60% decline in the stock price. With no trials left to conduct with CaPre, the company has now brought on Oppenheimer & Co to help in identifying strategic alternatives.
- ACST has been a loss-making company. The company’s net loss was C$3.2 million in 2020 compared to a net loss of $12.1 million for the three months to December 31, 2019.
- The company has been attempting to preserve cash by reducing staff, discontinuing all commercialization activities, and putting R&D activities on hold. This is not a long-term solution.
- The bottomline remains that the company has no product, no sales, no revenues, low staff, nothing in pipeline, and failed FDA approval on only product. The shares of ACST looks poised for a decline decline if the company is unable to secure a strategic merger or partner before their cash runs out.
- The weekly chart shows that the stock is currently trading near a supply area.
#5 McEwen Mining Inc. (NYSE: MUX)
Company Info: McEwan Mining Inc is a mining and minerals production and exploration company focused on precious and base minerals in Argentina, Mexico, and the United States. The company owns and operates the wholly-owned El Gallo 1 mine in Mexico, and has a minority shareholding in the company that operates the San Jose mine in Argentina.
Website: www.mcewenmining.com
Last Close: $1.07
Reason for the hype: Filing of feasibility study report of company’s Fenix project in Mexico; and rising metal prices (copper, silver and gold).
Latest 10-k report: https://sec.report/Document/0001558370-20-002800/
Red Flags:
- The company’s losses have been increasing year over year. For the year ended December 31, 2019, MUX reported a net loss of $59.7 million (or $0.17 per share) compared to $44.9 million in 2018 (or $0.13 per share)
- The final ruling was against the Company in relation to its lawsuit filed in respect of the constitutional validity of the Mexican Tax Reform which included a 0.5% precious metals royalty applicable to mining companies.
- The company’s long-term debt is recorded at a carrying value of $49.5 million on December 31, 2019. MUX has a $10.0 million long-term debt coming due in the next 12 months. This could reduce the company’s working capital, making it necessary to curtail, defer or suspend operational expenditures, and/or raise capital through various financing methods, which may include incurring debt, issuing equity, and other forms of financing.
- The company has been issuing many new shares in the last several years, with the latest being the sale of an aggregate of 30,000,000 shares of common stock at a purchase price of $1.05 per share. This has resulted in share dilution. This is not a great sign. In addition, the company has a disappointing reserve update.
- The Company has reported a significant reduction in contained ounces at Gold Bar, from 430,000 gold ounces to 302,000 recoverable gold ounces. This could impact the overall profits.
- The weekly chart shows that the stock’s prevailing downtrend is still unbroken.
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