The Best Source for Penny Stock Insight
And fraud fighter, former Crazy Eddie’s CFO, and convicted felon Sam Antar has an interesting take on it. Patrick Byrne is taking over his duties, which is bad for the company but good for the shorts.
Disclosure: I have no position in OSTK and no connection with Antar. I have a disclosure policy.
I came across the following information when investigating my favorite penny stock, Continental Fuels (OTC BB: CFUL). Continental Fuels hired Crosscheck Capital 7 months ago to pump up its stock. It appears that Crosscheck Capital is associated with George Mahfouz Jr., who was previously fined $230,000 by the SEC back in 2000.
I should note that George Mahfouz Jr. is not listed as a member of Crosscheck Capital, but a trust with the name Mahfouz and a Paula Mahfouz are listed as members. Furthermore, there is a Paula Mahfouz who is a member of Crosscheck and who is related to George Mahfouz Jr. (probably his wife, although I am not sure). How do I know she is related? On a shareholder list of Pantheon Technologies back in 2000, the two are listed as shareholders and have the same address (search the 10sb12g form for ‘Paula Mahfouz’ to find this). Considering how few Mahfouz there are in Arizona (23 total according to phone records), and considering the base rate probability of <.001% of any one person being a penny stock promoter, I can conclude beyond a reasonable doubt (but not with certainty) that the Paula Mahfouz of Crosscheck is related to George Mahfouz Jr. and therefore that George Mahfouz Jr. is thus associated (if not directly involved with) Crosscheck Capital.
I should also mention that if Mr. Mahfouz has been actively involved with Crosscheck Capital from its inception in 2004, then he violated his agreement with the SEC that prohibited him from touting microcaps for five years after September 2000. If he has not been actively involved with the business then he has has not violated his agreement or any law. That being said, sending out fliers to hundreds of thousands of unsophisticated investors touting worthless companies and only disclosing a conflict of interest in the fine print is immoral, even though it is legal.
Disclosure: I hate stock pumpers, whether their activities are legal or illegal. I would also like to express my displeasure with the Arizona state agency that deals with businesses: they had no record of Mr. Mahfouz’s previous business, despite an SEC litigation release that stated it was an LLC formed in Arizona. I have no position in CFUL.
Perhaps one of the most important pieces of information that an investor needs to decide whether a company is fairly valued or not is the number of shares outstanding, particularly the number of fully diluted shares outstanding. With that and the stock price an investor can calculate the market cap of the company and use earnings and book value figures to calculate valuation ratios or run a DCF analyis.
I just ran across one company that evidently does not think that is important information. Cytocore (OTC BB: CYOE) is not unlike many of the other companies that arouse my ire. It is an OTC-traded microcap with little in the way of book value or revenues. I came across it while searching for more companies to short sell (a favorite hobby of mine). What struck me about Cytocore is that the company has not published figures anywhere that reveal the number of shares outstanding and thus the company’s market cap.
Cytocore (which has the least informative website I have ever seen) had 353 million shares outstanding as of its last 10Q, filed on November 12, 2007. The company also had a proxy statement announcing a meeting of stockholders on November 19, 2007 to vote on whether or not to effect a reverse stock split. The proxy did not have an exact proportion for the split, rather it was a range of “not less than one-for-five and not more than one-for-ten”. Since then the company has not announced in any SEC filing the exact proportion of the reverse stock split and the resulting number of shares outstanding or even if the resolution passed. Depending upon what happened, the company could have a market cap of anywhere from $100 million to $1 billion.
While the question of whether to invest is easily answered–the company is overvalued at any market cap–the question of why this company would fail to disclose something so important is difficult to answer. It appears that the company put out a press release, but it never filed an 8k to document the press release (as appears to be required by law). By the way, Cytocore effected a 1 for 10 reverse stock split (as shown in the above-linked press release fragment).
Forbes Informer put out an article that lambasted Cytocore almost a year ago. Unsurprisingly, Cytocore’s ‘investors’ have underperformed the market by 55% since then.
Disclosure: I have no position in CYOE. I have a disclosure policy.
I just saw an ad for Guaranteed Consumer Funding, which offers to sell electronics (they were hawking a computer) for cheap payments to people with bad credit. For the computer they were offering (worth about $400 on a good day, although it is easy to find a computer for $500 that is far superior), the consumer would have to pay $1569 over one year. This works out to a 400% APR. Ouch. The company hides this fact in its ads and mentions only the $30 weekly payment without saying how many payments are owed.
In comparison, buying a superior computer for $500 and then paying 30% on credit cards for one year would cost $650. Of course, my favorite method, saving the money in a bank account, would cost only $500. It would only take 17 weeks of saving at $30 per week to be able to pay cash for a superior computer than the one issued by Guaranteed Consumer Funding.
Some people wonder why many poor people are poor. Medical problems and job problems are often reasons, but the largest single reason is an unwillingness to delay gratification and save. While income matters, avoiding spending matters even more. I know a man who makes $200,000 per year as a financial adviser who has saved less for retirement than a woman who never made more than $30,000 per year (and who put a kid through college as a single mother).
The best way to save is to make sure you are not tempted to spend. If you get a raise or a better-paying job, increase the proportion of your income that you put into your 401(k) and IRA. You do not need a fancy house or a new car. As for myself and my dear wife, we are taking my advice. My wife will be putting 50% of her income at her new job into her 401(k) and I am putting 100% of my eligible income into a solo 401(k). We will also contribute the maximum to our IRAs. From income that we are not eligible to stick in a tax-deferred account we will have just enough left over for living expenses. That way we will not be tempted to buy unnecessary things such as my next car.
How can we afford that? We have a modest home, drive a 4.5 year old compact car, and because I work from home, we only need one car (that saves us about $5,000 per year). We still have plenty of money left for the good things in life, such as a 7-year old $60 bottle of Tokaji wine I just opened today (which is rated 95 by Wine Spectator; I find it to be marvelous).
The SEC just won a judgment against Nicholas A. Czuczko of www.thestockster.com. According to the SEC, Czuczko “promoted thinly-traded penny stocks on his Stockster website while he personally planned to sell his shares of the stocks into the rising price spurred by the recommendation.”
Czuczko was forced to disgorge $1.5 million in profits and $120,000 in interest and he was forced to pay a punitive fine of $100,000. While the judgment is to be lauded, the punitive fine is too small. I believe that he should have received a punitive fine that was at least equal to the damages he caused.
While I have little sympathy for Czuczko’s victims due to their greed and idiocy (why would they trust some random guy with a website?), pump and dump scams will continue to proliferate until the SEC gets serious about increasing the punishment to those who mislead investors for their own profit.
If something looks like a duck and acts like a duck, especially if it quacks like a duck, then it is almost certainly a duck. If something looks like an asset and acts like an asset, than it should be treated as an asset and put on the balance sheet of the company that owns it. What is ownership of an asset? Ownership implies control and the ability to profit from an asset. In terms of consolidated subsidiaries on audited balance sheets, ownership implies the ability to suffer losses from the asset. Recent credit market problems have revealed hundreds of billions of owned assets and related liabilities that banks such as Citigroup [[c]] and insurance companies such as AIG [[aig]] kept off their balance sheets. This was in clear violation of the spirit (if not the letter) of GAAP. Simply put, these companies fooled their investors by skirting the intent of GAAP while remaining true to the letter of the GAAP rule on consolidation of special purpose entities. One clear result: Citigroup finally consolidated $49 billion of SIVs that supposedly it never owned and did not deign to put on its balance sheet.
Anatomy of a Structured Investment Vehicle (SIV)
A SIV has one purpose: interest rate arbitrage. Via financial voodoo and certain guarantees that a SIV usually obtains from its sponsoring institution (aka owner), SIVs can borrow money at extremely low rates, such as LIBOR. After borrowing a ton of money at or near LIBOR, a SIV will then buy various securities that yield more than LIBOR. The interest rate spread is split between the nominal owner of the SIV and the sponsor or real owner (such as Citigroup). SIVs usually have very little equity and are levered greater than 10x and up to 14x. That means that for every $1 of equity in the SIV (provided partially by the sponsoring institution and partially by various investors), the SIV can have $10 of assets and $10 of debt. This leverage is in itself dangerous, but is not much different from the leverage inherent in all banks. However, SIVs are structurally insolvent, as they owe short term debt but own long-term debt assets. They rely upon the short-term commercial paper market to sell their debt. Their assets are long-term debt such as CMBS, RMBS, CDOs, along with plain-vanilla corporate debt.
For more information on SIVs, I suggest the excellent article on them by Randy Kirk on SeekingAlpha. The problem with the SIVs is that to get their high credit ratings, without which they would have been unprofitable, they required backstop funding agreements from their bank sponsors. So Citigroup, for example, agreed to provide up to $10 billion in backup funding to its $49 billion worth of SIVs if they could not sell their debt. This meant that if trouble came, Citigroup would be on the hook for $10 billion (most of which it lent to its SIVs a couple months ago). If times got really bad, the SIV could become completely insolvent and it is theoretically possible that Citigroup could have lost the entire $10 billion. Yet despite this risk (which I will admit was remote), Citigroup did not consolidate the SIV on its balance sheet as it should have done. Its Tier 1 capital ratio was artificially inflated (duping banking regulators), its investors were left in the dark, and it earned essentially free money from the SIV that artificially pumped up its ROA and ROE.
This is one case where GAAP fails and IFRS did a much better job. GAAP consolidation rules need to be quickly amended to prevent future shenanigans of this sort.
Disclosure: I have no direct interest in any stock mentioned. My disclosure policy has a 0% debt to total capital ratio.
Q: Is NNRI very undervalued?
A: Ha ha ha ha. Seriously, what is wrong with you? What could be undervalued about a little over-hyped penny stock with no assets, no sales, sketchy management, and a $66 million market cap?
Q: Are there problems with technical analysis?
A: Yes. It doesn’t work. Actually, I have to qualify that: there is some evidence that momentum exists, such that companies near their 52-week highs (or lows) tend to outperform (or underperform). However, complicated technical analysis is worse than useless.
Q: I want to invest in YTBLA.
A: I mourn for your net worth, which shall soon fall.
Q: Why is YTBLA’s stock price declining?
A: Because the company’s business is nothing more than a pyramid scheme that shall soon fall apart.
Q: I want to find a blog on cheap stock under $2.
A: Um, just because a share price is cheap does not mean anything. That is like saying that a 14″ diameter pizza cut into 100 slices is bigger than one that is cut into 4 slices. What matters is the stock price in relation to earnings per share, book value per share, and cash flow per share.
Q: Who are some famous short sellers?
A: Jim Chanos is probably the most famous. Jesse Livermore made money both long and short back in the day. Manuel Asensio achieved some prominence. Andrew Left of Citron Research is a prominent short seller of microcaps. I will soon join the ranks of famous short sellers.
Q: Are hedge funds an Illuminati scam?
A: Yes. I work directly for the core council of the Illuminati, so I would know. We also control all short selling activity, the UN, all major governments, and just about every union and company. The only major entity not controlled by the Illuminati is Rupert Murdoch’s News Corp. Of course, he has his own issues.
Q: Who are Krispy Kreme Short sellers?
A: They are smart people. I almost shorted Krispy Kreme [[kkd]]. I didn’t and I missed out on making a lot of money. C’est la vie. My hunch is that Krispy Kreme will go bankrupt within the next two years. I am not willing to bet money on that, though.
Q: What about Continental Fuels Inc?
A: It continues its slow slide into irrelevance. That is the usual occurrence after a penny stock is pumped (that was last April and May in this case). The company’s stock price has fallen by 60% since I last called it way overvalued and over 90% from its peak.
Q: Is the SEC investigating Continental Fuels (OTC BB: CFUL)?
A: No. I previously contacted the SEC’s enforcement division about the company’s promotion of its stock at the same time it valued its stock at 1% of the market price in certain debt conversion transactions. The enforcement division never followed up on this activity. I guess people like Martha Stewart are a lot more dangerous than pump-and-dump schemes that bankrupt the gullible.
Q: Is it true that you cannot short sell OTC BB stocks?
A: No. It is just that most brokers do not allow it. I am aware of only a couple that do allow it. Also, for stocks priced below $2.50, there is negative leverage involved in short selling. A short seller needs $2.50 in cash for every share sold short (even if the shares are $0.50). This is why many OTC stocks maintain absurd market caps: their low share prices prevent short sellers as a practical matter from selling them short.
Disclosure: I have no interest in any company mentioned above. I have a disclosure policy.
I often write about companies I dislike and companies that I have sold short. I have made a good return on my short sales. Yet I have always recommended against short selling. Why I recommend against short selling was amply demonstrated by the stock of microcap Noble Roman’s (OTC BB: NROM) yesterday. The stock shot up 46% on no news. What happened? My bet is that the critical article on Noble Roman’s that I posted on Monday encouraged some people to short the stock and it encouraged some momentum longs to sell. That drove the price down 30% over the next two days. Yesterday some short sellers started to cover and that drove the stock price up a bit. Momentum players jumped back in long and soon the stock was back up to where it was Monday. Of course, this is just my idle speculation, but the effect on the stock price is quite real, no matter how it happened.
If someone shorted the stock at its low yesterday, that person would now be out a lot of money. They might even blame me for their losses. Yet for any stock, the short term is not indicative of the long term. In the short term the stock market is a voting game. Especially for small, illiquid stocks, prices fluctuate greatly depending upon supply and demand. But in the long term, the stock market is a weighing mechanism, and poor companies’ stocks will inevitably flounder. Most people have a hard time holding on to stocks they have bought (long) despite swings in short term prices. It is even harder to hold on when, with short selling, losses can theoretically be infinite. So stay away from short selling.
Disclosure: I am still short NROM and have not traded it since my first article on it last Monday, as per my disclosure policy.
I just received some OTC stock spam on behalf of Ido Security (OTC BB: IDOI). The company has 34.3 million shares outstanding (see the most recent 10Q for details), and at a recent price of $2.02 per share it has a market cap of $69 million. This despite a book value of $2 million, no revenues, and a loss of $9 million over the last nine months. The company has spent only $200,000 over the last nine months on R&D and yet it hopes to compete in the field of metal detectors.
Send this pumped-up penny stock into the trash can. Do not pass Go and do not collect $2 million (for those of you playing the updated Monopoly).
Following is the text of the spam email I received regarding this stock. I love the last paragraph:
Find out today, it will rock tomorrow IDO Security INC (IDOI.OB) Last Trade: Tuesday December 4th: $ 2.02
LOOK OUT Read this Great news about IDIO, and watch it trade on Wednesday!
The Honorable Tom Ridge Teams with IDO Security
IDO Security (OTC Bulletin Board: IDOI), a provider of innovative solutions for the homeland security market, today announced that The Honorable Tom Ridge, the first Secretary of the Department of Homeland Security, will provide special consulting services for the company. Governor Ridge will work with the company to accelerate U.S. implementation of the MagShoe high speed shoes-on portable footwear weapons detection system.
IDO Security, (OTC Bulletin Board: IDOI ) the provider of MagShoe(TM) high speed shoes-on portable footwear metal weapons detection system, commented on a joint assessment issued on October 24th by the Federal Bureau of Investigation and the Department of Homeland Security’s Office of Intelligence and Analysis that terrorists may be stepping up their shoe bombing efforts. The report was prompted by the capture of a suspect with a metal blasting cap concealed in a shoe.
IDO Security Inc., (OTC Bulletin Board: IDOI ) a provider of innovative detection solutions for the homeland security market including the MagShoe(TM) high speed shoes-on portable footwear metal weapons detection system, today announced the sale of additional MagShoe(TM) units from Port Lotniczy Gdansk Spolka z.o.o., the operators of Lech Walesa International Airport’s terminal facilities. This sale expands a prior installation of MagShoe(TM) units at the airport providing the capability to quickly and accurately screen all passengers for metallic weapons.
Information within this report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the SEC Act of 1934. Statements that involve discussions with respect to projections of future events are not statements of historical fact and may be forward looking statements. Don’t rely on them to make a decision. Past performance is never indicative of future results. We own 400,000 shares of IDOI, and intend to sell these share. This could cause the price to go down. Un-affiliated Third parties may own stock and will sell those shares without notice to you. This report shall not be construed as any kind of investment advice or solicitation. If you are not a savvy pink or bully investor we suggest you sit back and watch. You could lose all your money.
I love bicycling and reading and anything to do with animals. In Japan I grew up with baseball so I know a lot of the players over thereAt this point, only the radical third cam lobe actuated the valves for timing and liftWhen we saw some of her portfolio shots we knew we needed her–so much that we sent a photography team out to the backwoods of the Sunshine State to capture herWhat’s the best part of modeling?Choosing a radiator and a cap is only the beginning when it comes to upgrading your cooling We wanted them to leave! They were yelling out things like, “We know you can smile; just smile damn it!” We had to give the guys some Polaroids to make them go away. Not to mention it looks pretty dope on your crusty-ass ride.In conjunction with a variable-length intake manifold, the advanced VTEC engine anticipates having a 13-percent increase in combustion efficiency over current i-VTEC powerplants. After removing the OEM cat, we welded and bolted up an OBD II Magnaflow ceramic-core catalytic converter in place of the stock one. In early 2004, Ueo began designing AE86 suspension products under his label Desukara Desune With the Magnaflow cat installed, the Honda turned the rollers to the tune of 150hp and 107 lb-ft . The difference between the Laptop Dyno and the inertial dyno were negligible at best, with a difference of less than 2 hp and lb-ft of torqueWhat do you listen to?Additional mods include extending the arms into the rear cabin and welding brackets, making this kit better suited for the serious enthusiast.However, if you are running a rich mixture, the metallic cat is still your best bet.For me, the simple stuff is better: nice jeans, nice top, no braEvery girl wants an honest manIn addition, an advanced VTEC engine is slated to be released, sporting continuously variable-valve lift control and phasing of valve switchover timingWhen he starts talking about how great he is-like where he lives, what he drives, what he does after a few dates-you will know what kind of person he is.So if you could chose to live anywhere …How do you like being romanced?.
Disclosure: I have no interest in IDOI. I have a disclosure policy that has a $480 billion dollar contract with Homeland Security to produce a thought-control device with a range of 800,000 miles . However, I plan to subvert the government’s plan for imperial domination by using the device to encourage people to vote for Ron Paul.
This is not news for those of you who subscribe to Barron’s, but this morning’s Barron’s had a great article on Parkervision [[prkr]]. I suggest buying the paper and reading the article. If you are an online subscriber you can see the article here after logging in.
Parkervision is another of those companies that sell nothing but hopes and dreams that short sellers like myself love to hate. Another such company is Research Frontiers [[refr]], which I have previously panned. Parkervision’s dream is wireless technology. While the Barron’s article does not bring up any new information it did point me towards PVnotes.com. That website, run by the founder of Rambus and other technology companies (who is also a Parkervision short seller) archives just about all the negative news and opinion on Parkervision. It also contains original opinions on Parkervision’s technologies and patents.
While I have no intention of shorting Parkervision, I will bet my reputation that the company will never produce significant profits and will eventually go bankrupt.
Disclosure: I have no interest in PRKR or REFR. I have no connections to any current PRKR short sellers. I previously sold short both stocks and managed to lose money despite both stocks falling over 30% between when I started shorting them and the present. My disclosure policy has not lost over $160 million over its lifetime, unlike Parkervision.