Seeking Alpha

Omne's  Instablog

Omne
Send Message
I am a full-time investor/trader, fund manager, and father. I have a B.S. in Physics and a B.S.M.E. in Engineering from the Georgia Institute of Technology, a M.S. in Physics from Leland Stanford Junior University, a M.P.P. from the John F. Kennedy School of Government at Harvard University, and... More
  • Will 2014 Be The Year Of The Microcaps? 11 comments
    Jan 8, 2014 6:44 PM | about stocks: PEII, PHOT, CERPQ-OLD

    I think we can all agree that last year was every investor's and/or trader's dream. The markets increased in value, on a whole, by approximately 30%, and from whatever part of the economic spectrum you hail, it would've been difficult to actually LOSE money for the year, without making a conscious effort to do so. The large cap and mid cap stocks were simply on fire, and while we all climbed the wall of worry in anticipation of everything from QE tapering to anemic job growth, we still made money. It didn't seem to matter what we did ... we still made money. In fact, I would dare to venture that many individual investors outperformed even the best performing mutual and hedge funds, and any other investment vehicle you can imagine. Part of it WAS the QE, but part of it was also the result of nearly 6 years of pent up desire to trade something; ANYTHING, in order to not only make money, but to quench the thirst of the gambler inside each of us, no matter how well we keep him in check. And so, the U.S. markets flourished during the year 2013. Now what?

    I believe that 2014 will continue to see the markets flourish and money to be made, but I see a frothy head on this glass of stout, and it primarily resides on the top of the large and mid-cap beers. I don't see commodities or bonds as an alternative to these hard run securities, either. What I do see, and we saw beginning to occur in the world of small-caps during 2013, is a move to more speculative plays, because to put it bluntly: The upside to most of the mid and large-cap stocks needs a breather. But, instead of just putting their money into REIT's, ETF's, and even more small-caps, I believe we could see a substantial move to the micro-caps. That's right, I said it. The Land of Copper! Or, for those of you whom have quickly tired of my metaphors (I know I have), penny stocks. Even sub-penny stocks. And I'm going to explain to you why.

    First of all, not all penny stocks are terrible companies. I find it amusing at times that the most experienced of investors sometimes seem to forget the very REASON the OTC exists. It exists so that companies can raise money without having to give up gargantuan future profits to potential venture capitalists. In fact, the simplest way to think of trading a stock on the OTC (indeed ANY stock) is to think of it as offering the retail investor the chance to become a venture capitalist, investing his or her money in a company whose product they believe in (for the purposes of this magnificently crafted metaphor, I won't go into the flippers, swing traders, scalpers, etc., although even they play an important role in the markets by providing much needed liquidity).

    Now, that being said, let us NOT underestimate the extremely high risks involved in not only trading a company's stock on the OTC because the company can't afford to trade on one of the major exchanges, but also because the OTC lacks entire encyclopedias full of rules and regulations (read: oversight) that even the most taciturn exchanges have in place to make sure that there is at least the semblance of a fair playing field. I am, of course, oversimplifying things just a bit, but only to make the point that, while stocks trading on the pinksheets can offer tremendous potential for a very fast and high ROI, they can just as easily take your money and run. This is because of the nature of the beast. The high risk to reward ratio oftentimes feels more like gambling than either trading or investing. That's not to say that ALL stocks that start out on the OTC are scams or unworthy of a serious look. It's just that they carry an inherently greater risk, and therefore, the POSSIBILITY of a greater reward capacity within a given period of time compared to their mid and large-cap brothers and sisters. And regardless of how serious your fund manager or financial advisor is, I can almost guarantee you that he or she spends at least part of their spare time, combing through obscure websites and SEC filings, dutifully attempting to put together a more complete image of what may have befallen a certain company's stock, or if lucky, what makes it that rare "diamond in the rough" that we all dream of finding. And yes, we ALL have done it before, at least from time to time. Why? Because, for a very small investment (sometimes as little as a few thousand or even hundred dollars), we can share in the opportunity to WIN BIG! In that way, it IS, indeed, like gambling. In other ways, however, if done properly, a potential investor can do his or her due diligence and end up with something more valuable than striking gold. But it's not easy. There are thousands upon thousands of them, and the pinksheets didn't get their reputation without a good reason. Many of these "stocks" are little more than ways to scam unsuspecting and novice traders/investors in handing over their often hard earned cash, just so the proprietor of the business whose shares you own may pay themselves an outrageous salary and live and extravagant lifestyle, without EVER having the slightest intention of making their "company" a success. Such is the way of free market capitalism in America, and if done properly, believe it or not, it is not illegal.

    Now that we've discussed a bit about the nature of stocks traded on the OTC, along with why I believe many investors will turn to microcaps in order to find that higher gain that they got used to in 2013, let's talk about some actual OTC stocks! There are two types of OTC stocks: 1.) The stock that used to trade on a major exchange and has, for any number of reasons, fallen below the said exchange's listing requirements, and 2.) The stock that started out on the pinksheets because it either could not FIND a venture capitalist interested in financing it, or the stock that voluntarily chose to raise money to finance itself by issuing shares, and selling them to would be investors who would then become part owners in the company, share in its profits, but almost universally, in the case of penny stocks, NOT have any significant control over the direction the company takes or the day to day operations of the company (and this is a good thing, for the most part, due to the too many chiefs and not enough Indians phenomenon). Most of the stocks in The Land of Copper that I choose to investigate and possibly purchase, fall into the latter category. Let's start with the basic statistics of the OTC. The odds of a stock trading on the pinksheets actually "making it" and ending up on a major exchange are something like less than 2%. Out of those, you have to comb through the stocks that once WERE traded on a major exchange, but no longer are, and the ones that started on the OTC and will one day (you're hoping) end up on a major exchange. In a sense, the latter type of OTC stock is simply a stock that has had its IPO without any fanfare and usually without any profits to show its investors, to begin with.

    Which stocks trading on the OTC make the best investments? Which of them have the best chance of "making it?" That's a topic of MUCH discussion amongst the "pinksheeters" (there's actually another name for that, but it's a bit crude, and I must endeavor to keep it clean on Seeking Alpha). In many ways, finding the right OTC stock to invest in is no different than finding any other stock to invest in. The same general principles apply. I look for a stock whose company has value, obviously. How do I know what said company's value is? I ATTEMPT to find out in much the same way as a stock traded on the Nasdaq or NYSE, but herein lies the difference: Stocks traded on the OTC are not required to meet the same filing standards as those on various major exchanges. In other words, they are not required to divulge certain information to their shareholders, either at all, or at least in a timely fashion. To put it simply, they're not required to be as transparent as those listed on major exchanges. However, this DOES NOT mean that they won't, and that's one of the criteria I base my judgment on. How transparent, forthcoming and easy to get in touch with is the company I choose to invest in? Some are virtually black holes, where your money goes in, and little to no information or money ever comes out. These are obviously not your best bet. Strangely enough, they might become immensely successful and blow away the competition, but it's just that they have little to no interest in shareholder communications. That's not necessarily a bad thing, as any early investors in Apple, Inc. (AAPL) can attest to, but as a general rule, you're looking for as much transparency as possible from the companies you're invested in. The reasons for this, especially on the OTC, are obvious. Without information, you simply have no way of making investment decisions, or even worse, sometimes the information listed is grossly out of date (think of outstanding shares). Without an accurate and current outstanding share count, there's simply no way to calculate market capitalization. There's one search engine/portal/website in particular, whose financial information and key statistics are always so horribly out of date, that I don't even bother checking them any longer, and I've seen many swing/day traders get burned rather badly by basing their trading decisions on that outdated information. For instance, I have a long position in a microcap oil and natural gas company called Petron Energy II, Inc. (PEII), and this particular website had its OS listed as approximately 9 million shares for quite some time, when it was obvious that number was incorrect, due to dilution, as well as the fact that, had that OS number been accurate, the market cap of the company would have been ridiculously low. How was that problem remedied? A fellow shareholder called the company and insisted that they keep a more current number of OS listed. The company listened and proceeded to keep its current OS on the homepage of its website! And that has helped tremendously. In fact, it's the reason I initiated a long position in (PEII). They care about their shareholders, and want to maintain as much transparency as possible. They've also started to have their CEO, Mr. Floyd Smith, appear on a business radio station every couple of weeks. That's important, because this is a very small company. If you're a shareholder in (PEII), you want to know what the shares outstanding are. You want to know what the latest production numbers are from their different well leases. And if the 5% stake in the Bakken Shale field deal is consummated with Phoenix Energy, you want to know that information, too! Why? Because this information directly affects the company's PPS.

    Another OTC company that does a good job of maintaining good investor relations and transparency is a bioresins manufacturer named Cereplast, Inc. (CERP). Their CEO, Frederic Scheer, appears on various sector-related news programs, and he himself is the co-founder of theBiodegradable Products Institute (BDI). But they DO NOT maintain an accurate OS anywhere that I can find. It's approximately 1 billion OS at this point, but until their quarterly meeting, there's really no way to be certain, and that makes it very difficult for potential investors to put a valuation on the company. Yet, still, it was up over 25% today. Petron Energy II was up 50% today! And that's after 3 previous days of gains, two of which were 30 plus percentage gainers.

    There are many others, too. Growlife, Inc. (PHOT) is up over 100% in the past week based on the recent legalization of marijuana in Colorado (they grow medical grade marijuana), and their balance sheet isn't bad looking for a penny stock. A week ago, you could have bought (PHOT) for approximately $0.11/share. today you could have sold that same share for $0.23/share. The future looks bright, for the moment, for companies that specialize in growing marijuana!

    I've named 3 penny or sub-penny stocks in this article, and all of them have a great deal of potential. I either currently own, or have previously owned all of them at some point, and I've made money on all of them. But how do we pick the next three? What's one of the major benefits, as well as drawbacks to investing/trading penny and sub-penny stocks? Well, for one thing, they tend to be very volatile. That's a good thing if you want to stare at your screen all day long, but if you have other things to do, it might come as a shock to you to come home and find out that your 100,000 shares of WXYZ are only worth 25% of what they were when you left earlier! It sounds like a nightmare, doesn't it? It's not, and here's how you do it:

    1.) Never invest money in a penny stock that you wouldn't be willing to give away to a charity.

    2.) Always do your due diligence on ANY stock you purchase, regardless of how inexpensive the stock price is, or how small of a position you're opening.

    3.) It's never about the actual amount of money lost or gained, it's about the percentage loss or gain (I know how that sounds, but you wouldn't believe how many novice traders can't grasp this basic concept).

    4.) Decide what percentage gain you're willing to take for a stock you own, and sell it for that, no matter what. If you get a 100-300% gain in one or two days, sell your shares and lock that profit in. Period!

    5.) Decide how much you're willing to lose on any open position (percentage-wise). If you lose 10% of your investment, sell. Don't think about it, just sell it and move on. There are thousands of stocks to play, especially on the OTC. The only exception is if you bought the stock for a good reason, and don't plan on selling it until it's reached that price per share. This is the same principle, but in reverse. What you're really doing is teaching yourself become disciplined in your trading.

    6.) The oldest cliche' in the book, but it's still true, ESPECIALLY with micro-cap stocks! Do NOT marry your stocks! There will always be another "once in a lifetime" opportunity. Microcap stocks are just too common and too numerous for it to not happen again. It's just a matter of patience. This is where you MUST detach yourself from your emotions and let the price come to you.

    I believe those six rules will make you, if not a great investor and/or trader, at least a good one. And if you follow them, at the very least, you won't go broke. Now, to wrap things up, I just want to point out that when the markets start getting frothy, it's an ideal time to start looking for your diamonds in the rough. You have the funds because last year was an amazing year, so why not take some of it and put it in something that could maximize your returns during what will likely be a less high-flying year for the mid and large-caps? I've listed three in this article that I believe will be major winners in 2014: Petron Energy II, Inc. (PEII), Growlife, Inc. (PHOT), and Cereplast, Inc. . For more information, you can read my article on PEII here, and an article from another Seeking Alpha contributor about PHOT here.

    If you have any questions about any of the smallcap stocks I've referenced above, or just wish to comment on, or discuss something about the article, please feel free to leave a comment below or message me. Have a pleasant day.

    Disclosure: I am long PEII, PHOT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: PEII, PHOT, CERPQ-OLD
Back To Omne's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (11)
Track new comments
  • wanna know
    , contributor
    Comments (2) | Send Message
     
    Phot (Growlife) does NOT grow medical grade marijuana. They sell equipment. for growing.
    8 Jan 2014, 07:36 PM Reply Like
  • Omne
    , contributor
    Comments (54) | Send Message
     
    Author’s reply » You're correct. My mistake in wording.
    9 Jan 2014, 10:45 AM Reply Like
  • batteredup
    , contributor
    Comments (57) | Send Message
     
    How do you feel about the proposed increase in available shares from 1b to 3b? Do you think it'll pass shareholder vote and with this on the horizon, why are you holding long?
    9 Jan 2014, 12:05 PM Reply Like
  • Omne
    , contributor
    Comments (54) | Send Message
     
    Author’s reply » Firstly, it will definitely pass, because of the was PEII has its shares structured. Due to that, the CEO's share will always count as 51% of the voting power. Secondly, they won't dilute to 3B shares. It's just there to prevent having to take on any more toxic financing, which is a good thing. Thirdly, they will be profitable long before they need to dilute to that level.
    9 Jan 2014, 12:19 PM Reply Like
  • congressmank
    , contributor
    Comment (1) | Send Message
     
    Good tips...how do you tell if a penny stock is diluted?
    9 Jan 2014, 02:01 PM Reply Like
  • Omne
    , contributor
    Comments (54) | Send Message
     
    Author’s reply » Good question. Due to the lack of transparency, it can sometimes be difficult to know exactly what the OS is. One of the best ways, and you're able to do this because the company isn't a huge monster, is to simply call and ask. PEII currently posts their OS count on their website from time to time as a result of a shareholder asking them to.
    10 Jan 2014, 06:02 AM Reply Like
  • Gtg007
    , contributor
    Comments (94) | Send Message
     
    Nice read Omne..I may start position in PEII soon...
    9 Jan 2014, 02:25 PM Reply Like
  • The Behavioral Economist
    , contributor
    Comments (851) | Send Message
     
    Dilution should be of little concern to any investors. However, what a company elects to do with the proceeds from an equity offering should be of great concern to shareholders.

     

    PEII, and the direction of the company, and thus the share price, will be largely contingent upon what this dilution results in. If they are using the proceeds to pad pockets, then that is an issue. If they are using the proceeds to secure their position in the bakken shale, then that is a progressive and responsible step. If that shale deal comes to pass, then the companies market cap should immediately be reflective of between 8-10 million dollars. The PPS at that time will be reflective of how many shares are truly outstanding, but either way, it should be by a factor of no less than 3 or 4.

     

    The problem with any sub-penny stock is that in order the raise funds which can be considered noteworthy, the number of shares required to comprise the offering are exorbitant. That makes it feel like dilution is never ending, when in fact it is simply proportional. If, in fact, bakken shale comes to pass, and if production from their existing sites meets or exceeds market expectations, then this could move the needle on the market cap to between 12 - 16.5 million by the end of quarter 2.

     

    For me, personally, it's not in my wheelhouse as an investor. However, I give Omne credit for sticking with this one, because as long shots go, this one isn't the worst I've ever seen. Right now I think it's a coin flip........but that still offers alot better odds than a lottery ticket.

     

    As far as PHOT is concerned, what they have that sets them apart is a "pick and shovel" business plan and a highly capable CEO with a strong resume. The volatility along the way will resemble a blind ferret on speed trying to find its way out of a room with no doors, but it could get there.

     

    Omne could be onto something with those two, if you have the stomach for it. Nice job here Omne.
    9 Jan 2014, 10:56 PM Reply Like
  • Omne
    , contributor
    Comments (54) | Send Message
     
    Author’s reply » Thank you, sir.
    10 Jan 2014, 06:03 AM Reply Like
  • Mayer.m@trophylimo.com
    , contributor
    Comment (1) | Send Message
     
    Hi Omne,

     

    Thank you for all your insight. What are your current thoughts on CERP? I have 1 mil shares averaged out at .0072. On 1/17 CERP filed an 8-k citing a loan default to Horizon of about 2mil.

     

    Defaults are nothing new for cerp and personally feel this will be easy to overcome. I would appreciate your insight.

     

    Thanks!
    19 Jan 2014, 01:12 PM Reply Like
  • Omne
    , contributor
    Comments (54) | Send Message
     
    Author’s reply » I like what CERP is trying to do, and I used to own it. My problem with CERP is that they're in a very similar situation to PEII in most ways, but with an additional HUGE hurdle to overcome, in that they're involved in the production of a product that is not widely in demand right now. The reason I sold my shares was that it just became crystal clear to me at one point that, regardless of how good the news was, the stock price wouldn't move due to the lack of interest in their product and the huge OS count. I wish them luck, and I really do hope they succeed, but I think time is much more of a factor for them than a company like PEII. There is a huge demand for PEII's product, so even a small improvement in performance will result in a massive increase, relatively speaking, in price per share. That, in a nutshell, is why I decided to put some extra money in PEII instead of reinvesting in CERP. Also, I had the chance to meet one of PEII's CEO's former partners, so I have a much better idea of how serious he is, and he's very serious. There's no doubt in my mind that PEII will be successful to some degree. It's just a matter of time, and with it trading at .0027/share, to say that it's severely oversold would be an understatement.
    19 Jan 2014, 05:05 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • Also, I'm very busy doing other things now, so I'm no longer actively trading. Just longs & the occasional scalp. Got tips? I'm all ears. :)
    Jan 23, 2014
  • In short, buy $PEII today and triple your money in a week and a half, 2 weeks max. No brainer to me. GLTA.
    Jan 23, 2014
  • I've confirmed from 3 SEPARATE sources that the Bakken Deal is real & is supposed to close end of month. That alone is worth .01pps 4 $PEII.
    Jan 23, 2014
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.