Trading OTC, Penny Small Cap Stocks: North Springs Resources And Acura Pharmaceuticals

by: Brian Nichols

I have never been a big fan of investing large sums of money into micro-cap or OTC penny stocks but every now and then an opportunity presents itself within one of these stocks that could potentially return large gains. In an earlier article, we looked at the common mistakes of those who invest in these small companies and gave a guideline of steps that should be taken to increase your chances of gains. In addition, we looked at some of the most successful returns from small cap status; one which returned a near $1 million gain from an initial $5,000 investment. Then we looked at two stocks, Abot Mining Company (OTCPK:ABOT) and TeamStaff (TSTF) which I believe met the criteria to provide long-term gains as a long-term investment. And after several requests along with significant interest in these small companies I am writing a series of micro-cap and OTC penny stocks that have a chance to return large gains over a period of several years.

Most of the time those who invest in micro-cap stocks are trading the stock, or gambling, rather than investing in a company. They make several mistakes which involve having no idea what the service that the company provides and are buying a stock that most likely returns large loss. To better explain I have included a few key points to remember, from the previous article, to help you when making an investment in a small company.

  • Most information regarding small-cap stocks come from newsletters. Before acting on the news as legit you should always try and familiarize yourself with the newsletter, or site that is publishing the material, to make sure it's a legitimate company with good intentions.
  • Very high volume small cap stocks are easily manipulated which means the price doesn't always reflect the true worth of the company.
  • OTC stocks are not listed on NASDAQ, or usually any other major exchange, because they are unable to meet listing requirements.
  • There are few regulations for OTC stocks, however they must provide financial statement to the SEC or another banking regulator.
  • The majority of the micro-cap or small-cap stocks trade with a yearly loss, and since these stocks are usually manipulated with high volume, and little information, it is most wise to purchase stocks that are trading with gains, because in some ways it's a gamble and this will increase your chances.

As of late I have purchased shares in quite a few small and micro-cap stocks. I would never use a large percentage of my portfolio to purchase these small companies but I believe that if a very small amount of your portfolio is used to purchase these stocks then it could prove to be rewarding. I use a very simple method in purchasing small and micro-cap stocks, and that is, I only purchase stocks that I believe have the potential to grow with its service or product. And more specifically, I like to purchase stocks in one of two industries.

I like to purchase stocks that have key developments that could change the company and operate in industries that return incredibly large gains with a breakthrough discovery. Therefore, I like to purchase small and micro-cap biotech companies or mining companies. I like small biotech companies because all the company needs is one blockbuster product and it can return mindboggling gains. And I like mining companies because acreage is typically cheap to acquire, and if the acreage is located in a good region then a large discovery is found it can return massive gains. Therefore I am looking at two companies that I have on my watchlist, that I believe could return massive gains in the near future: North Springs Resources (OTCPK:NSRS) and Acura Pharmaceuticals (NASDAQ:ACUR).

Last week I posted an instablog in which I looked at the growth prospects for a small mining company, North Springs Resources. The company is a very small Nevada based mineral exploration company focused on discovering and advancing precious metal properties in Nevada. The company's been very busy as of late in acquiring additional properties with what I believe have great prospects. However, the primary reason I like this small company is its location in Nevada and its recent expansion into other highly successful mining regions.

Nevada's been one of the largest and most mined states in the U.S. for many years, and is considered by some, to be one of the best areas in the world for gold mining. Yet, there has been some concerns that the state could run out of gold. However, estimates of gold reserves have remained at 10-12 years of projected production for the last 2 decades, which means the state is nowhere near running out of gold. With that being said, let's look at some of the property that NSRS is expected to mine.

One of the company's most exciting properties is the Guyana property, which sits next to the Omai mine property. The Omai property was re-discovered as a large scale commercial mine with over 4 million ounces of gold produced. I believe the fact that North Spring's property sits next to this highly productive property is a good sign that its Guyana property could produce a large amount of gold, or that a large amount of gold is present within the mines, possibly 2 million ounces or half of the Omai mines, which would create incredible profits if the mines return anywhere near this level of production.

Most small and micro-cap mining companies such as North Springs have one decent property and investors are buying the stock on the assumption or hope that the property will produce a large amount of whatever is being mined. However, North Springs has recently acquired a 20% working interest in the Goldstar/ One Arm Joe project which is located in Arizona, about 20 miles northeast of the famous Vulture mine. The company acquired 20% by funding $500,000 in exploration & development expenditures at the Goldstar property. This additional property could be huge for the company that already has several small properties and one large in Nevada. It also appears the company's not wasting any time, now that a drilling program has been established and is expected to commence later this month.

As I said with most exploration or mining small cap companies investors are hoping on one successful property and then hope the company grows from the success of the property. But with North Springs the company has several properties and two properties with a significant history of producing large amounts of gold. I believe the company is well-positioned for growth and if these properties can produce gold at half the rate that I expect then it will return very large gains in a short period of time. To read more including the outlook of gold and additional information regarding the company's property click here.

I have been long Acura Pharmaceuticals for quite some time, and believe that it will return one of the best gains in biotechnology over the next three years, with a multi-billion dollar market cap. The company is one of the best positioned most undervalued biotech companies in the industry with a market cap of just over $160 million. It has a patent protected technology, an FDA approved drug, and a partnership with one of the best companies in the industry; Pfizer (NYSE:PFE).

Acura Pharmaceuticals' AVERSION technology is a deterrent that discourages the common methods of prescription abuse in narcotics: snorting, injecting, etc. The company's technology was approved in 2011, with Pfizer, for the drug Oxecta which is a combination of oxycodone and the AVERSION technology. I believe this drug will be transcendent in how physicians prescribe narcotic drugs which will create very high profits for ACUR.

Back before I was a full-time investor and a writer at Seeking Alpha, I worked for the state of Kentucky with inmates, with extensive drug histories, and helped prepare them for life outside of prison. During the two years that I held this position I had access to many great studies and was able to better understand the behavior of people with long-term periods of addiction. And what I found was that more than half of these people become addicted to drugs after an injury that requires long-term pain management with narcotics. Even studies suggest that most people who become addicted to narcotics develop the addiction after an injury of some sort, and that anyone who is given a narcotic for longer than 6 weeks will become dependent in some way. These facts are affecting the way physicians prescribe narcotics with many refusing to prescribe, regardless of its need, in fear that the patient will become addicted. Therefore the need for a drug such as Oxecta, which will allow physicians to prescribe narcotic pain medication without the fear of abuse, is very much in demand.

There are approximately 50 million scripts written for oxycodone per year which is the second most in the narcotic drug class. The number of prescription being written per year means the demand is very high for this drug and that it could return very high profits for both ACUR and PFE. In addition, to an already approved Oxecta, Acura has several pipeline drugs with Pfizer that include a hydrocodone based drug with the AVERSION technology. And since hydrocodone is the most prescribed drug in the U.S., with more than 130 scripts written annually, the avenues for revenue and profit are seemingly endless.

Acura has all the benefits of a small company with a breakthrough technology without the concerns. Because of its partnership with Pfizer, Acura is not responsible for any of the marketing or manufacturing of the drug, which can cost 100's of millions of dollars for small pharma. Instead, Pfizer which is one of the best, will be handling all of the manufacturing, marketing, and distributing of the drug, and then ACUR receives milestone payments and a percentage, most believe 10%, of the proceeds from sales of Oxecta. This means ACUR has very low costs and high profits, and because of several pipeline drugs and a new technology, an abuse deterrent in cough medicines used for crystal meth, I believe Acura is on pace to control the mutli-billion dollar industry that is drug abuse. It's an exciting company and because of its market cap I believe it's worth a small investment.

After giving encouraging data for two companies that are seemingly headed for greatness it's important to remember that small cap stocks are still high risk. I like the two companies listed above and after my own due diligence it's my opinion that both companies have a promising future based on what we know about each company. There are 1000's of small cap and OTC stocks and more than likely if you choose to invest in these companies you are going to return a loss. However, ever-so-often there are companies of this size that make good decisions and with a little luck grow into massive corporations and return mind boggling gains.

I don't believe that any investor should invest a large portion of their portfolio in these stocks but a very small position could return large gains, if the position is treated like an investment and not a trade. I personally like mining and biotech stocks because, like I said, I believe these stocks have lower risks with greater rewards, and it doesn't take a large position to return gains if the company's potential is reached.

Both of the companies that I've described have encouraging developments and have the potential for large gains with a small investment of no more than $5,000. There is no reason to bet your children's college fund on a speculative small or OTC company, it only takes a small portion of a portfolio, and if you are right the gains could be limitless. I will conclude with a visual on why I prefer biotech and mining stocks with a chart that shows the large returns of three very small mining companies that had great discoveries and grew much larger, and two biotech companies with breakthrough drugs that have returned large gains in a short period of time. The chart is based on a $5,000 initial investment, and it shows how much the return would have been if the stock was purchased when it was a highly speculative small company with a micro status market cap. And another thing to remember is that the returns of the gold companies below could be higher, because most have fallen with the price of gold, so make sure to keep that in mind!

Company Ticker Year Bought Market Cap When Bought Today's Market Cap Return
Allied Nevada Gold (NYSEMKT:ANV) 2007 $167.04 million $2.87 billion $85,500
Nevsun Resources (NYSEMKT:NSU) 2008 $64 million $1.22 billion $95,500
Jazz Pharmaceutical (NASDAQ:JAZZ) 2009 $26 million $1.97 billion $375,000
Questcor Pharmaceutical (QCOR) 2007 $22 million $2.29 billion $520,000
Royal Gold (NASDAQ:RGLD) 1992 $1.66 million $3.77 billion $11,300,000

Disclosure: I am long (ACUR).