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: Alkaline Water Company Inc. (NASDAQ: WTER)
Today’s penny stock pick is the drink company, Alkaline Water Company Inc. (NASDAQ: WTER).
Alkaline Water Company Inc. produces, distributes, and markets bottled alkaline water in the United States. It also provides flavored bottled alkaline water in various flavors to convenience stores, natural food products stores, large ethnic markets, and national retailers.
The company offers bottled alkaline water in various volumes under the Alkaline88 brand. In addition, it engages in the selling of hemp-derived CBD topical and ingestible products under the A88CBD brand.
Website: www.thealkalinewaterco.com
Latest 10-k report: https://sec.report/Document/0001062993-21-006297/
Analyst Consensus: According to TipRanks analytics, Canaccord Genuity downgraded WTER to ‘Sell’ with a price target of $1, while H.C. Wainwright reiterated a ‘Buy’ rating for the stock with a price target of $3.00.
Potential Catalysts / Reasons for the Hype:
- The news of the company’s distribution agreement with Premier Distribution Services to make Alkaline88 available in gym coolers across the Country. The agreement would also help the company launch and drive the pilot for the new aluminum, 2-liter, and flavor-infused products.
- Shaquille O’Neal joining Alkaline Water Co. as an equity partner, becoming the company’s largest shareholder.
- The company getting included in the Russell Microcap® Index.
- The news about Associated Wholesale Grocers adding 1 Gallon and bulk 3 Liter bottles of Alkaline88 to five warehouses.
- WTER’s partnership with CEFCO Convenience Stores to sell Alkaline88’s 1-liter single serve size in more than 200 high volume stores across six states.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Double Bottom Pattern Breakout: The daily chart shows that the stock has currently broken out of a double bottom pattern. This is marked in pink color. A double bottom pattern is a strong bullish pattern and a breakout from it would indicate that the stock could surge higher.
WTER – Daily Chart
#2 Above MAs: The stock price is currently above its short-term moving average of 50-day as well as the long-term moving average of 200-day SMA. This is a possible bullish sign.
#3 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) line is greater than the (-DI) line, the ADX and (+DI) lines are above the (-DI) line, and the ADX line is moving up from below the (-DI) and (+DI) lines.
#4 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#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 possible bullishness.
#6 Downtrend Broken: The weekly chart shows that the stock has broken out of the prevailing downtrend and is now slowly moving higher. The downtrend line is marked in orange color. The stock is also trading above its 50-week as well as 200-week SMA. All these are possible bullish signs.
WTER – Weekly Chart
#7 MACD above Signal Line: In the weekly chart as well, the MACD (light blue color) is currently above the MACD signal line (orange color), indicating bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for WTER is above the price of $1.90.
Target Prices: Our target prices are $2.60 and $4.30.
Stop Loss: To limit risk, place a stop loss at $1.50. Note that the stop loss is on a closing basis.
Our target potential upside is 37% to 126%.
For a risk of $0.40, our first target reward is $0.70, and the second target reward is $2.40. This is a nearly 1:2 and 1:6 risk-reward trade.
In other words, this trade offers 2x to 6x more potential upside than downside.
Potential Risks / Red Flags:
- The company had reported a 20% increase in its revenue for the year ended March 31, 2021, to $46,069,121 when compared to $38,429,505 for the year ended March 31, 2020. Yet, the company’s net loss increased Year-Over-Year, from $14,826,821 in March 2020 to 16,409,520 in March 2021.
WTER – Revenue Vs Net Loss
- The company has incurred accumulated net losses of $69,931,220 from inception through the period ended March 31, 2021.
WTER – Consolidated Net Loss
- The company is operating in a highly competitive sector and faces significant competition from the likes of Smartwater black label owned by Coco-Cola. The price of WTER products is also quite high, costing nearly four times when compared to some of its competitors.
- The company seems to have a high cash burn, on reviewing their 10-Q filed Feb 16 2021, for the period ending Dec 31, 2020. They have been paying for everything with common stock sales, presumably Shaquille O’Neal included. In case the company is unable to generate the revenue for ongoing operations, there may be another equity offering, causing dilution.
WTER – 10-Q
- In spite of being a loss-making company, the compensation of the company executives increased significantly year-over-year.
WTER – Executive Compensation
- As of the latest 10-Q filing, the company has Preferred stock, $0.001 par value, 100,000,000 shares authorized, nil issued and outstanding on December 31, 2020, and 3,400,000 Series D issued and outstanding on March 31, 2020; and Common stock, Class A – $0.001 par value, 200,000,000 shares authorized 73,637,115 and 45,585,592 shares issued and outstanding at December 31, 2020, and March 31, 2020, respectively.
- The company was recently sued for fraud by Minneapolis Marketing Group Castello Sales, a brand accelerator that works with emerging, mid-tier and established brands, and North American retailers.
- The company’s founder, Steven Nickolas had filed a lawsuit alleging that James Decker, who was brought on to help finance the company, is manipulating the price of the stock.
- On April 5, 2021, The Alkaline Water Company Inc. was given a deficiency letter from the Listing Qualifications Department of The NASDAQ Stock Market, notifying the Company that since the Company has not held an annual meeting of shareholders within twelve months of the end of the Company’s fiscal year ended March 31, 2020, it no longer complies with the listing rules of The NASDAQ Capital Market pursuant to Listing Rules 5620(a) and 5810(c)(2)(G)).
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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