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 | Gatekeeper Systems Inc. | OTCMKTS: GKPRF | $0.60 |
| 2 | American Battery Metals Corp | OTCMKTS: ABML | $2.16 |
| 3 | HIVE Blockchain Technologies Ltd | OTC: HVBTF | $2.39 |
| 4 | New York Mortgage Trust Inc. | NASDAQ: NYMT | $4.71 |
| 5 | Alpine 4 Holdings Inc. | OTCMKTS: ALPP | $3.25 |
#1 Gatekeeper Systems Inc. (OTCMKTS: GKPRF)
Company Info: Gatekeeper Systems Inc is a provider of intelligent video solutions designed to provide a safer transportation environment for children, passengers, and public safety personnel on multiple transportation modes. The company uses AI, video analytics, and mobile data collectors to inter-connect public transit assets as part of intelligent transportation systems for Smart City initiatives. Its Platform-as-a-Service (PaaS) business model is designed to connect moving vehicles in the era of IoT.
Website: www.gatekeeper-systems.com
Last Close: $0.60
Reason for the hype: The news that the company grew its revenue over the last three years, and also moved from loss-making to profitable; signing of contracts with department of defense, and with Philadelphia Transit; the company been contracted to equip a fleet of approximately 170 school buses in Alberta, Canada with wirelessly-enabled intelligent mobile data collectors and interior high-definition video; intelligent heat sensing system’s covid potential; and rumors of potential takeover by another company.
Latest 10-k report: No reports available after 2015 on both SEC website and OTC Markets website
Red Flags:
- The company has not filed any annual report after 2015 in both SEC and OTC markets. This gives very low visibility on the company’s fundamentals.
- As per the 2020 annual report available on the company’s website, the company had a net income of $3,579,224 for the year ended August 31, 2020, compared to the net loss of $294,962 for the year ended August 31, 2019. However, Gatekeeper Systems had profited from a tax benefit which contributed CA$1.5m to profit. Though tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.
- The company does not have any patents for cloud services or camera functions. They are a service provider. With increasing immunizations, the covid potential is becoming less important, despite company expansion.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The charts show that the stock is bullish only above a certain level.
#2 American Battery Metals Corp (OTCMKTS: ABML)
Company Info: American Battery Metals Corporation is an American-owned, 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: www.batterymetals.com
Last Close: $2.16
Reason for the hype: The company benefiting from policies of the new presidential administration as it is considered a clean energy play; the news that the company has entered into a partnership by way of which it is going to help with the recycling as well as collection of electric vehicle batteries; the news that the company entered into escrow on 13.8 acre property located in Tahoe Reno Industrial Park
Latest 10-k report: https://sec.report/Document/0001078782-20-000720/
Red Flags:
- The Company has a history of losses. 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. During the three months ended March 31, 2021, the Company reported a net loss of $4,987,356 or $0.01 loss per share.
- During the nine months ended March 31, 2021, the Company incurred $31,837,067 of operating expenses compared to $4,493,703 of operating expenses during the nine months ended March 31, 2020. This is a massive increase in operating expense.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- Despite the lack of revenue and increasing losses, the executives were paid more than $4 million as compensation (which included Salary, Bonus, and Stock Awards) for the years 2019 and 2020.
- 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 very little experience with mining, or battery technology.
- AMBL was earlier known as LithiumOre Corp, a wholly-owned subsidiary of Oroplata Resources Inc., and would soon to be re-named American Battery Technology Company (ABTC). Such frequent name changes are usually not a good sign.
- There were rumors that some potential investors checked the company’s registered address on yahoo and found it to be a Post Office box at Incline Village.
- The company has an ongoing legal proceeding against former CEO, Craig Alford.
- The chart shows that the stock remains bullish only above a certain level.
#3 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: $2.39
Reason for the hype: The news that the company received approval to list its common shares on the Nasdaq Capital Markets Exchange, where it will begin trading soon; the company completing the share swap transaction with DeFi Technologies Inc. pursuant to which HIVE will receive 10,000,000 common shares of DeFi Technologies; Green Energy Mining with Elon Musk stepping in to promote the stock; and rising crypto prices.
Latest 10-k report: https://sec.report/otc/financial-report/257951
Red Flags:
- The company had reported a net loss of $1,662,823 for the Year ended March 31, 2020. The company is currently profitable, reporting an income of $13.7 million for the three months ended December 31, 2020, which is an increase of approximately 174% from the prior year due to an increase in cryptocurrency prices, the increased production of Bitcoin with the Quebec facility acquisition and the purchase of miners for that facility. However, any broader market decline of all crypto including Ether could significantly impact the stock prices.
- 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 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.
- As part of the Norway Acquisition, the Company had assumed loans with a principal balance of $2,559,599 (NOK 20,915,000). The loans are in default as of December 31, 2020. The company now has a loan balance of $3,109,076 as of December 31, 2020.
- HIVE is anticipated to take advantage of the Nasdaq up list by doing a private placement at a price well below current price, which could result in significant dilution.
- The company is currently holding the release of 2Q results as the price of BTC and ETH is currently down, and the value of the stock is somewhat mirrored by the two coin’s prices. This is not a good practice.
- The cryptocurrency Ether won’t be mined once it moves to Ethereum 2.0. Once Ethereum 2.0 is fully implemented it will kill Eth mining altogether. The network will move from PoW (mining) to PoS (staking), making mining completely redundant.
- The charts show that the stock remains bullish only above a certain level.
#4 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: $4.71
Reason for the hype: The company reporting a quarterly dividend of $0.10 per share, representing a $0.40 annualized dividend and a dividend yield of 8.62%.
Latest 10-k report: https://sec.report/Document/0001273685-21-000032/
Red Flags:
- The company reported a realized loss of $73.1 million for the year ended December 31, 2020, and a total net loss of $44.1 million for the year ended December 31, 2020.
- 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.
- 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 also 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 low insider ownership of less than 1%, while the general public has a 45% stake in the company. Low insider ownership is typically not a good 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. 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.
- The charts show that there is a near-term resistance area for the stock.
#5 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: $3.25
Reason for the hype: The company’s Nasdaq up list request anticipated to be approved anytime now.
Latest 10-k report: https://sec.report/Document/0001096906-21-000759/
Red Flags:
- Alpine 4 has been a loss-making company. The company has incurred net losses of $39,795,401 since inception through December 31, 2020. The company’s net loss was $8,049,873 for the year ended December 31, 2020, which is more than double the loss reported for 2019.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing. Although there has been a Nasdaq up list request, the approval may not happen due to the rule IM-5101-2, which states that listing of Companies Whose Business Plan is to Complete One or More Acquisitions will not be permitted.
- Grizzly Research has referred to Alpine 4 Holdings as a scam in its 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 shows that the stock would be bullish only above the level marked in purple color, due to the formation of a bearish chart 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
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