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 | New York Mortgage Trust Inc. | NASDAQ: NYMT | $4.40 |
| 2 | ViewRay, Inc. | NASDAQ: VRAY | $5.19 |
| 3 | Resonant Inc. | NASDAQ: RESN | $2.77 |
| 4 | Obseva SA | NASDAQ: OBSV | $2.76 |
| 5 | Ocean Power Technologies Inc. | NASDAQ: OPTT | $2.06 |
#1 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 and 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: $4.40
Reason for the hype: NYMT’s latest quarterly earnings of $0.11 per share, in line with the estimate; and Maxim Group’s Buy rating on New York Mortgage.
Latest 10-k report: https://sec.report/Document/0001273685-21-000032/
Red Flags:
- The company reported a total net loss of $44.1 million for the year ended December 31, 2020, and unrealized losses of $30.7 million for the year ended December 31, 2019.
- NYMT had issued 85.1 million shares of common stock collectively through two underwritten public offerings, resulting in total net proceeds of $511.9 million in 1H 2020. The company had recently announced the completion of a private placement of $100 million of senior notes due 2026. All this could result in dilution of shares.
- Data suggests that insiders own under 1% of New York Mortgage Trust, Inc. while the general public has a 45% stake in the company. Low insider ownership is typically not a good sign.
- NYMT is a mortgage REIT, or mREIT, with the operating model of profiting off the spread between prime bank loans and mortgage rates. They have no “true” real estate operations. This is a highly speculative investment with a little safety net if their spread doesn’t hold up. There is also an increased possibility of things going wrong, like foreclosures, people paying mortgages ahead of schedule, and decreasing interest rate spread. There is also a rumor of the real-estate bubble being formed right now.
- 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. Given the company’s constant inability to generate enough earnings, or cash flows to cover the dividends, it may be unsustainable to provide a high dividend payment in the long-run.
- The company’s debt is also not well covered by operating cash flow, and the earnings are forecast to decline for the next 3 years. The market and economic disruptions caused by COVID-19 may also continue to negatively impact the company’s business.
- 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 charts show that there is a near-term resistance area for the stock.
#2 ViewRay, Inc. (NASDAQ: VRAY)
Company Info: ViewRay Inc is a radiation therapy and imaging technology company. It designs, manufactures, and markets radiation therapy systems that provide real-time imaging during radiation treatment. Its product portfolio encompasses The MRIdian linac system, The MRIdian system, Monte Carlo treatment planning system, etc. The company holds license for its combination of MRI and radiation therapy technologies.
Website: www.viewray.com
Last Close: $5.19
Reason for the hype: Company reporting better-than-expected Q1 sales results.
Latest 10-k report: https://sec.report/Document/0001564590-21-011089/
Red Flags:
- The company has historically incurred substantial net losses, including net losses of $107.9 million, $120.2 million, and $76.4 million during the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the company had an accumulated deficit of $627.1 million.
- On September 10, 2019, a complaint about patent infringement was filed by Varian Medical Systems, Inc. alleging that the Company infringes two related patents.
- On September 13, 2019, a class action complaint about violation of federal securities laws was filed in U.S. District Court for the Northern District of Ohio against the Company, alleging violation of federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts concerning the company’s business, operations, and financial results.
- On July 22, 2020, a stockholder derivative lawsuit was filed against ViewRay alleging that the officers and directors violated Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets, and was unjustly enriched based on factual assertions.
- Despite reporting a revenue of $57,017,000, the company’s business reported a net loss of nearly double its revenue. The company burned through nearly $3 million in cash.
- The company has intense competition from the heavy weights like Medtronic, Varian Medical Systems, Elekta AB, GE Healthcare, and more.
- The company would be able to garner orders and become profitable only if the data coming from the various clinical studies underway in 2021, is supportive of the excellent outcomes shown in smaller, earlier studies in Amsterdam and elsewhere.
- The charts show that there is a near-term resistance area for the stock.
#3 Resonant Inc. (NASDAQ: RESN)
Company Info: Resonant Inc is a late-stage development company. It is developing software, intellectual property and a services platform to increase designer efficiency, reduce time to market and lower unit cost in the design of filters for radio frequency front ends for mobile device industry.
Website: www.resonant.com
Last Close: $2.77
Reason for the hype: The company announcing the first quarter 2021 operational summary & preliminary financial results; and becoming an official member of the Wi-Fi Alliance.
Latest 10-k report: https://sec.report/Document/0001579910-21-000005/
Red Flags:
- As of December 31, 2020, the company’s accumulated deficit totaled $150.9 million. In the year ended December 31, 2020, RESN’s net loss totaled $28.4 million. This clearly indicates that RESN is a loss-making company.
- The company states in its Annual report that to date, it had not generated significant revenues to enable profitability. The company also adds that it expects to continue to incur significant losses. These factors raise substantial doubt regarding the company’s ability to continue as a going concern.
- RESN has only a limited operating history, as it was founded in January 2012.
- Shareholders have been diluted in the past year, with total shares outstanding growing by 14.2%.
- The company does not have any catalyst to move higher until Murata Manufacturing Co., Ltd starts volume shipping Resonant’s XBAR RF filters in cellular phones.
- The company is currently unprofitable and not forecast to become profitable in the near-term. It may require additional capital to continue operations in the future, resulting in further share dilution.
- The company has a history of class action lawsuits. Two putative class action lawsuits were filed in March 2015 against the Company and certain members of the Board of Directors and executives and subsequently settled.
- The charts show that there is a near-term resistance area for the stock.
#4 Obseva SA (NASDAQ: OBSV)
Company Info: ObsEva SA is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for serious conditions that compromise a woman’s reproductive health and pregnancy. The company is focused on providing therapeutic solutions for women between the ages of 15 and 49 who suffer from reproductive health conditions that affect their quality of life, ability to conceive, or that complicate pregnancy and the health of newborns. The is developing OBE2109 as a novel, oral gonadotropin-releasing hormone, or GnRH, receptor antagonist, for the treatment of pain associated with endometriosis and heavy menstrual bleeding associated with uterine fibroids in pre-menopausal women.
Website: www.obseva.com
Last Close: $2.76
Reason for the hype: The company announcing the completion of enrollment for the Phase 3 EDELWEISS 3 trial of Yeslty for patients with moderate to severe endometriosis-associated pain; and ongoing phase 2 trial for fertility drug Nolasiban in China.
Latest 10-k report: (20-F) https://sec.report/Document/0001564590-21-011091/
Red Flags:
- OBSV has been a loss-making company. Since its inception, OBSV has incurred significant operating losses. The net loss was $83.0 million, $108.8 million, and $76.7 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the company has reported accumulated losses of $410.0 million.
- The company currently generates no revenue from the sales of therapeutics products or biopharmaceutical product candidates. OBSV’s limited operating history and absence of revenue from product sales make it difficult to evaluate the success of the company’s business to date and future viability.
- The company requires extensive capital for clinical trials. Raising additional capital may cause dilution to shareholders, restrict operations or require the company to relinquish rights to intellectual property or future revenue streams.
- The company’s ongoing clinical trials have been and may be further delayed as a result of the COVID-19 pandemic. This could further delay the possibility of revenue generation.
- The result of clinical trials may not satisfy the requirements of the FDA or other applicable foreign regulatory authorities. The regulatory approval process of the FDA, EMA, or any comparable foreign regulatory agency may also be lengthy, time-consuming, and unpredictable.
- The company has strong competition from the likes of Myovant Sciences Ltd, which has 900 million in cash.
- Despite being a loss-making company, the company executives were paid $7,698,000 as compensation in 2020.
- The bottomline is that the company’s cash burn is ongoing at a record pace without any new achievements. This seems like a risky bet right now.
- The chart shows that the stock is currently in a downtrend and would be bullish only above the near-term resistance level.
#5 Ocean Power Technologies Inc. (NASDAQ: OPTT)
Company Info: Ocean Power Technologies Inc is a renewable wave-energy technology company, which is engaged in developing systems that generate electricity by harnessing the renewable energy of ocean waves. It offers the PowerBuoy technology which integrates with hydrodynamics, electronics, energy conversion, and computer control systems to extract the natural energy in ocean waves. Geographically, it derives a majority of revenue from North America and also has a presence in Europe and Asia, and Australia.
Website: www.oceanpowertechnologies.com
Last Close: $2.06
Reason for the hype: The release of a new surveillance system powered through the PowerBuoy; rumors of Navy contract
Latest 10-k report: https://sec.report/Document/0001493152-20-012094/
Red Flags:
- The annual report shows that the company has incurred net losses since it began operations in 1994. This included net losses of $10.4 million and $12.2 million in fiscal 2020 and 2019, respectively. As of April 30, 2020, the company had an accumulated deficit of $220.1 million.
- Historically, a small number of customers provided substantially all of the company’s revenues and is expected to continue in the future as well. Such concentration is a risk.
- The company was served NASDAQ delisting notification on March 3, 2020, for non- compliance with the minimum bid price requirement for continued listing.
- There are multiple ongoing legal proceedings against the company.
- The Company is currently undergoing an income tax audit in Spain for the period from 2011 to 2014, the Spanish tax inspector has raised questions with respect to the Company’s recognition of funds received during this time period from a governmental grant from the European Commission in connection with the Waveport project.
- The company is facing employment litigation from Charles Dunleavy for the alleged wrongful termination of his employment as Chief Executive Officer.
- The decision of the United Kingdom to exit from the European Union (E.U.) could cause disruptions to and create uncertainty surrounding the company’s business, including affecting its relationships with existing and potential customers, suppliers, and employees. This could also hurt future profitability.
- Although the company works in clean energy which is the future, the execution required is huge. They need big contracts and good catalysts for a significant upmove.
- The chart shows that the stock’s uptrend has been broken.
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