The allure of penny stocks lies in their potential to deliver massive gains in a short period. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment.
Although the potential reward may make it worthwhile, choosing the right penny stock is a daunting task. Nevertheless, we’ll do our best to identify short-term trade opportunities in this exciting space.
With this in mind, we’re starting a new series called “Penny Stock of the Day”. These ideas are geared for traders with a high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: SPAR Group Inc. (NASDAQ: SGRP)
Today’s penny stock pick is the merchandising and marketing services company, SPAR Group Inc. (NASDAQ: SGRP).
SPAR Group Inc. serves mass merchandisers; pharmacies; grocery, office supply, dollar, automotive, convenience, specialty, electronic, and home improvement stores; and other retail outlets.
The company offers merchandising and marketing services and also provides in-store event staffing, product sampling, audit services, furniture, and other product assembly services, technology services, and marketing research services.
The company operation is divided into two reportable segments: Domestic Merchandising Services division, which provides nationwide merchandising and other marketing services throughout the United States of America; and International Merchandising Services division, which provides similar merchandising, marketing, audit, and in-store event staffing services in Australia, Brazil, Canada, China, India, Japan, Mexico, South Africa, and Turkey.
Website: www.sparinc.com
Latest 10-k report: https://sec.report/Document/0001437749-21-007784/
Analyst Consensus: Not covered by analysts currently.
Potential Catalysts / Reasons for the Hype:
- SPAR announcing a short-term bridging finance plan to help retailers affected by the unrest in South Africa and engaging with its retailers to provide necessary assistance with their insurance claims.
- The company continuing to report solid financial results and growth. SPAR Group had reported consolidated net revenue of $61.1 million in Q1 2021 compared to $61.3 million in Q1 2020.
SGRP – Q1 Result
- Reddit bulls providing traction and giving hype to the stock.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Consolidation Area Breakout: The daily chart shows that the stock has been trading within a range for the past several months. This area is marked as a purple color rectangle in the daily chart. Currently, the stock has broken out of this consolidation area with a high volume. Once a stock breaks out from a consolidation area, it usually moves higher.
SGRP – Daily Chart
#2 Price above MAs: The price is currently above the short-term moving average of 50-day SMA as well as the longer-term moving average of 200-day SMA. This usually implies a possible bullish bias for the stock.
#3 Bullish MACD: As you can see from the daily chart, the MACD line (blue color) is currently above the signal line (orange color). This indicates a possible bullish bias.
#4 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) and ADX lines are greater than the (-DI) line, and the ADX line has currently started to move up from below the (-DI) and (+DI) lines.
#5 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30 in the daily chart. This indicates bullishness.
#6 Flag Pattern Breakout: As seen from the weekly chart, the stock was in a strong uptrend after which it started consolidating and was in a narrowing range. This is a classic flag pattern and is marked in the chart in purple color. A flag is a continuation pattern. Whenever a stock breaks out of this pattern, it typically continues its previous trend (uptrend in this case). Currently, the stock has broken out of the flag pattern with high volume and is also trading above its 50-week as well as 200-week SMA. All these indicate bullishness.
SGRP – Weekly Chart
#7 MACD above Signal Line: In the weekly chart as well, the MACD line (blue color) is currently above the signal line (orange color). This indicates a possible bullish bias.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for SGRP is above the near-term resistance area, which translates to a price of $2.30. This is marked as a green color dotted line in the chart.
Target Prices: Our target prices are $3.50 and $5.00.
Stop Loss: To limit risk, place a stop loss at $1.70. Note that the stop loss is on a closing basis.
Our target potential upside is 52% to 117%.
For a risk of $0.60, our first target reward is $1.20, and the second target reward is $2.70. This is a nearly 1:2 and 1:5 risk-reward trade.
In other words, this trade offers 2x to 5x more potential upside than downside.
Potential Risks / Red Flags:
- There has been a lot of insider selling over the past six months. During the past three months, shares worth $481,539 were sold by company insiders. This is nearly five times the total purchase amount of $98,755 by the company insiders during the same time period. The overall insider sentiment for SGRP is negative, based on 4 informative insider transactions by 4 unique insiders during the past 3 months.
SGRP – Insider Transactions
- The company had announced a repurchase program of up to 500,000 shares of common stock through Dec. 22, 2021. Presuming that the company would want to buy back those shares at the lowest price, there are rumors of share price manipulation going on to keep the price low until all shares are purchased.
- Three Independent Board Members resigned from the company last month because they believed the company’s two major shareholder’s efforts could weaken Board independence, interfere with operations of the company’s business, and adversely affect the company’s liquidity and minority shareholders.
- In case the company does not have enough independent directors, it could be forced to delist from NASDAQ due to the lack of director independence. As a result of the Resignations, SGRP received a notification letter from Nasdaq dated June 15, 2021, stating that SGRP no longer complies with Nasdaq’s majority independent director and audit committee requirements as set forth in Nasdaq Listing Rule 5605.
- The company had previously received a notification letter from Nasdaq dated December 10, 2018, stating that SGRP had failed to maintain a minimum closing bid price of $1.00 per share for shares of the SGRP Common Stock for the prior 30 consecutive business days preceding the Nasdaq Bid Price Deficiency Letter as required by Nasdaq Listing Rule 5550(a)(2). The company had to regain compliance with the Bid Price Rule by maintaining a closing bid price of $1.00 per share for a minimum of ten consecutive business days. Only on December 28, 2020, SGRP regained compliance with Listing Rule 5550(a)(2).
- Robert G. Brown and William H. Bartels had recently resigned as SGRP’s Chairman and Vice Chairman respectively. From October 2018 through January 2019, Mr. Brown and Mr. Bartels, in a series of correspondence, demanded from SGRP advancement and indemnification of their respective shares of legal fees and expenses incurred by them in connection with the Delaware Actions and other related party litigation matters. It is rumored that they have the majority of the board, owning 50%+ through some subsidiaries and other family members. This demand, amounting to approximately $5 million, if approved, can significantly damage the company.
- SGRP’s net income now amounts to a very small percentage of revenue. This seems pretty thin.
SGRP – Revenue Vs Net Income
- The profits made by their foreign partners cannot be repatriated and this could hurt the cash of SGRP. It is also rumored that the company could be artificially inflating the Profit and Loss since no cash or earnings are repatriated back to the US.
- The company’s receivables are continuously growing and now make up nearly 50% of the company’s assets. Any big write-offs of these could hit the company hard. Based on management’s assessment, the Company established an allowance for doubtful accounts of $563,000 and $438,000 on December 31, 2020, and 2019, respectively. The bad debt expense was $330,000 and $83,000 for the years ended December 31, 2020 and 2019, respectively.
SGRP – Assets Vs Accounts receivable
- The bottom line is that despite being a company with solid financial results and growth, the multiple red flags warrant utmost caution when trading the stock.
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
— Trades of the Day Research Team
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