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Penny stock example

A Penny Stock Example

Sunrise Consulting (SNRS.pk -- closed at $0.0001 per share on 6/6/11) wants to be a conglomerate in the same way Berkshire Hathaway is (they say so on their website!). Sort of. It says it has always wanted to get into the solar industry in the quickest way possible. And to do that, it will sell...devices to prevent the cellphone radiation! Presumably they're solar powered. It also wants to get its products into Apple stores and Best Buy. Yeah, who doesn't?

Interestingly, though, its website says its "vision is to be a premier investment banking and financial group in Asia & Pacific Rim." As if we didn't have enough problems with Chinese reverse merger stocks, Sunrise plans on being "one of the pioneers in bringing Chinese companies to be listed on the USA Exchanges."

They better get cracking because there are lots of companies already bringing shady RTO stocks to American investors. Sunrise Consulting seems to be having something of an identity crisis.

Let's also point out that Sunrise does not file any financial statements with the SEC. Instead they file forms with PinkSheets.com, as many super small companies do, but that's not a regulatory agency. But what the filings show is the company has no revenues, had less than $2,500 (yes, two thousand five hundred dollars) in the bank, 16 billion shares outstanding, and its shareholders equity went from a positive $232,000 to a deficit of $375,000 after it restated its finances to account for some executive compensation they forgot to include. Oops.

Oops, indeed

Unfortunately, the market is full of companies with great ideas that have little chance of ever becoming successful. Instead they become black holes that investors pour their money into, never to be seen again.

In general, investors should stay far, far away from penny stocks. There is a reason the investing legends of the world -- Buffett, Lynch, Ruane, Davis, etc. -- don't invest in penny stocks. It's because they are losing propositions.

While here and there you may be able to find one company that makes good on its promise, the vast, vast majority of times you're going to wind up on the losing side of the coin toss.

Reasons you'll lose

First, because penny stocks are so small, they tend to be very thinly traded. There aren't a lot of shares changing hands and they're not traded on a national exchange, so they rely upon what are called "market makers" -- companies or individuals who will buy and sell the shares -- and it is they who determine what the price of a stock will be. That makes them ripe for manipulation.

Worse, many penny stock companies are not so much scams as "ideas," like Sunrise Consulting. If you go back over this discussion board, you'll find many requests for our opinion on this penny stock or that. Invariably what you'll find is my response showing that the companies are little more than a shell -- long on ideas, but short on a means of turning them into a profit. They say they want to be the next Microsoft or Wal-Mart, but they're unable to translate it into reality (in this case they're going to be bought by them).

Sunrise throws out a lot of big names -- Apple, Best Buy, etc. -- and says it wants its products in there, which means they have exactly none there now.

More often than not, their founders are just seizing on the latest hot idea and they're trying to churn up interest in the stock to get the price to jump...so they can bail out and reap a windfall. You're left holding essentially worthless paper.

"Danger, Will Robinson!"

I liked this particular press release from Sunrise last December:

Sunrise Consulting "announced today the company has concluded a lengthy agreement with a provisional patent holder that has multiple contracts with vendors related to some of the most popular mobile phone and computer devices on the planet. It has been agreed by both parties that an updated news release will be circulated on Thursday, December 16th, 2010."

So they had an agreement with someone who doesn't yet have a patent but may one day. Provisional patents are simply "placeholders." While they offer many of the same protections as patents, the holder has to do other steps very quickly otherwise the protections expire and the next person in line can file for patent protection.

Now that company is said to have contracts with vendors "related" to mobile phone and computer devices and they'll tell you more about it in two days.

This is simply a company operating by press release. Continue with a steady stream of releases to pump up or prop up the share price.

A safer bet

We didn't point out the flaws in Sunrise Consulting to belittle anyone's investing here, but rather to highlight that we as investors need to look a little more closely at the stocks we give our money to before we do so. Unfortunately, not doing so is a very common occurrence.

Typically, the safer bet is to simply avoid penny stocks all the time and focus on those with a quantifiable advantage in the marketplace.

Return to the penny stock page.