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 | Alpine 4 Holdings Inc. | OTCMKTS: ALPP | $4.20 |
| 2 | New York Mortgage Trust Inc. | NASDAQ: NYMT | $4.70 |
| 3 | Babcock & Wilcox Enterprises Inc. | NYSE: BW | $7.57 |
| 4 | POET Technologies Inc. | OTCMKTS: POETF | $1.02 |
| 5 | HIVE Blockchain Technologies Ltd. | OTC: HVBTF | $3.87 |
#1 Alpine 4 Holdings Inc. (OTCMKTS: ALPP)
Company Info: Alpine 4 Technologies Ltd engages in the provision of software, automotive technologies, electronics manufacturing, energy services, and fabrication technologies, and industries. The company segments include Quality Circuit Assembly (QCA) and American Precision Fabricators (APF). It derives maximum wealth from the QCA segment. Its products include 6th Sense Auto that provides sales team management information and Brake Active Technology that helps involved in collision and injury.
Website: www.alpine4.com
Last Close: $4.20
Reason for the hype: Merger of subsidiaries Deluxe Sheet Metal, Inc. and Morris Sheet Metal Corporation to Become One of the Largest Sheet Metal Contractors in Midwest/North Central U.S; the announcement of the creation of A4 Defense Systems, Inc. for surveillance needs; and the of plans for debt payoffs
Latest 10-k report: https://sec.report/Document/0001445866-20-000782/
Red Flags:
- Alpine 4 has been a loss-making company. The company has incurred net losses of $31,745,528 since inception through December 31, 2019.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- Grizzly Research has referred to Alpine 4 Holdings as a scam in its recent report. The report called it a failed holding company propelled by the wings of a defunct drone company.
- According to their report, Alpine 4 Technologies has many red flags. The company started as a blank check company and its recent claim to fame circles around the prospect of flying high alongside the hyped drone industry; The company’s Sales VP was charged with health care fraud and at one time faced up to ten years in prison; and ALPP’s acquisition Impossible Aerospace Corp in Nov 2020 is rumored to have no production facility or verifiable tangible assets.
- The company spent $6 million for the acquisition of Impossible Aerospace despite being a loss-making company.
- The company has a history of discontinued operations. In December 2018, the Company shut down the operations of its Venture West Energy Services (VWES) subsidiary. In February 2019, VWES filed for Chapter 7 bankruptcy. Interestingly, VWES was formerly Horizon Well Testing, LLC.
- The daily chart of ALPP shows that the stock would remain bearish below $3.86.
#2 New York Mortgage Trust Inc. (NASDAQ: NYMT)
Company Info: New York Mortgage Trust Inc is a real estate investment trust for federal income tax purposes, in the business of acquiring, investing in, financing, and managing mortgage-related and residential housing-related assets. The company’s investment portfolio consists of Structured multi-family property investments such as multi-family CMBS an preferred equity in, and mezzanine loans to owners of multi-family properties. Distressed residential assets such as residential mortgage loans sourced from distressed markets and non-Agency RMBS. Second mortgages, Agency RMBS, and certain other mortgage-related and residential housing-related assets.
Website: www.nymtrust.com
Last Close: $4.70
Reason for the hype: New York Mortgage Trust declaring a dividend of $0.1000 per share on 03/15/2021; and increasing demand for single-family homes fueled by low mortgage rates and the stay-at-home environment resulting in higher gains from loan sales.
Latest 10-k report: https://sec.report/Document/0001273685-21-000032/
Red Flags:
- The business model of mREITs (mortgage REIT) is inherently risky, as such companies are highly leveraged. There is an increased possibility of things going wrong, like foreclosures, people paying mortgages ahead of schedule, and decreasing interest rate spread (the difference between retail and prime interest rate narrowing).
- The company had reported a total net loss of $44.1 million for the year ended December 31, 2020. This is a worrying sign.
- The company may have declining profits due to the cyclical nature of the real estate sector
- Over the past few years, New York Mortgage Trust has exited their low-margin agency securities and redeployed the capital into a more profitable multi-family and distressed residential mortgage. It seems unreasonable to think that the company will be able to sustain such a high dividend payment (15% yield) given their constant inability to generate enough earnings, or cash flows to cover the dividend.
- New York Mortgage Trust has paid out over 100% of its earnings and operating cash flow for nine quarters. To continue this, the Company must successfully allocate all their agency funds into multi-family mortgages, and achieve their desired synergies, which carries risks of its own.
- New York Mortgage Trust has been covering their cash shortfall by drawing from their retained earnings. This, in turn, has decreased the value of equity on the balance sheet. The company has now compounded this problem by issuing new equity, resulting in a material decrease in the Company’s book value per share. If the company continues its trend of covering the shortfall with equity, it will dilute both the dividend investors receive and the Company’s EPS, and continue to shrink the book value of New York Mortgage Trust.
- The weekly chart shows that the stock is near a resistance area.
#3 Babcock & Wilcox Enterprises Inc. (NYSE: BW)
Company Info: Babcock & Wilcox Enterprises Inc provides advanced fossil and renewable power generation and environmental equipment. The firm operates in three segments: Babcock & Wilcox segment focuses on the supply of, and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation; Volund & Other Renewable segment provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries; and SPIG segment provides custom-engineered cooling systems, services, and aftermarket products. Babcock & Wilcox segment generates most of the revenue.
Website: www.babcock.com
Last Close: $7.57
Reason for the hype: The company’s fourth quarter and full year 2020 results; BW scheduled to present at the virtual Gabelli Funds 7th Annual Waste & Environmental Services Symposium; and the company booking new construction service projects in North America valued at approximately $13 million.
Latest 10-k report: https://sec.report/Document/0001630805-21-000004/
Red Flags:
- According to the company’s most recent financial statement as reported on March 8, 2021, its total debt is at $377.32 million, with $377.32 million in long-term debt. Adjusting for $57.34 million in cash-equivalents, the company has a net debt of $319.98 million.
- The company has a history of going through bankruptcy in early 2000 due to a class action lawsuit over asbestos exposure.
- The company decreasing revenues and significant debt. Their assets to Liabilities for Q3 2020 were below 1. All these point to the company’s lackluster fundamentals.
- The company is currently unprofitable and is not forecast to become profitable over the next 3 years.
- The company recently completed the closing of $297.5 million of common stock and senior notes offerings, translating to share dilutions.
- Nearly 55% of the company’s shares are held by the general public, who are mostly retail investors. There is low insider holding, which could point to the lack of faith by the management.
- The company has ongoing litigation relating to boiler installation and supply contract against P.H. Glatfelter Company. A derivative and class action complaint was also filed against Company’s directors, executives, and significant stockholders by B&W stockholder.
- The U.S. SEC is conducting a formal investigation of the Company, focusing on the accounting charges and related matters involving the Company’s B&W Renewable segment from 2015-2019.
- The monthly chart shows that the stock has not yet broken out of its prevailing downtrend.
#4 POET Technologies Inc. (OTCMKTS: POETF)
Company Info: POET Technologies Inc offers integration solutions based on the POET Optical Interposer (OI), a novel platform for the seamless integration of electronic and photonic devices into a single module using advanced wafer-level manufacturing techniques and packaging methods. The company’s OI eliminates costly components and labor-intensive assembly, alignment, burn-in, and testing employed in conventional photonics. The cost-efficient integration scheme and scalability of the POET OI brings value to any device or system that integrates electronics and photonics, including the areas of computing, such as AI, IoT, autonomous vehicles, and high-speed networking for data centers. It has operations in Allentown, PA, and Singapore.
Website: www.poet-technologies.com
Last Close: $1.02
Reason for the hype: Development and supply agreements with a technology leader in photonic neural network systems for Artificial Intelligence (AI) applications; 8 new patents approved during 2020 for POET.
Latest 10-k report: https://sec.report/Document/0001171843-20-005023/
Red Flags:
- POETF is a loss-making company. It had reported net loss from continuing operations, before taxes of $11,727,372 during the year ended December 31, 2019.
- The company had issued a total of 34,800,000 Units at a price of C$0.36 per Unit pursuant to a placement agency agreement on Nov 2, 2016. Each Unit contained one common share of the Company and one common share purchase warrant with each Warrant exercisable by the holder thereof to acquire one additional Share at a price of C$0.52 per Share. There are many 52 cents warrants that are still outstanding from 2016 November. These warrants could drive down the stock price when exercised.
- Future sales of common stock or warrants, or the prospect of future sales, may also depress POET’s stock price. The exercise of share purchase options and warrants will create dilution which could adversely affect the Company’s shareholder.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The company has depreciating assets. The Company’s balance sheet as of December 31, 2019, reflects assets with a book value of $24,077,355 compared to $25,137,903 as of December 31, 2018.
- As at December 31, 2019, the Company had a working capital balance of $15,354,149, which was just enough funds to meet its operating requirements for 12 months.
- The monthly chart of POETF is as shown below.
#5 HIVE Blockchain Technologies Ltd. (OTC: HVBTF)
Company Info: HVBTF is a TSX.V-listed company building a bridge from the blockchain sector to traditional capital markets. HIVE owns state-of-the-art green energy-powered data centre facilities in Canada, Sweden, and Iceland which produce newly minted digital currencies like Bitcoin and Ethereum continuously on the cloud.
Website: https://hiveblockchain.com/
Last Close: $3.87
Reason for the hype: Reports about the company starting the 20-F process for seeking uplisting; a surge in Ethereum gas rates; and upcoming Q4 earnings
Latest 10-k report: https://backend.otcmarkets.com/otcapi/company/financial-report/257951/content (not available in SEC filings)
Red Flags:
- The company does not have any recent financial reports available in SEC.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The company had loans that were due December 31, 2018 with an interest rate of 6% per annum. As the loans were not repaid by the due date of December 31, 2018 the interest rate has now increased to 9% per annum.
- The company is a loss-making company, with a loss of $1,662,823 for Year ended March 31, 2020.
- In May 2018, the Company completed the acquisition of two entities in Norway for which the company also issued 1,250,000 warrants exercisable at C$1.24 for a period of five years. These warrants, when exercised, would result in a share dilution.
- The company was up 2,000% over the past year, while BTC was up 605% over the same period. The stock’s underlying assets and optimistic projects of future sales do not seem to justify the current valuation. This, in turn, could result in a potential correction.
- The monthly chart shows the formation of a double top pattern.
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