There is something unique about the biotech industry in general, and cancer medicine in particular. Every industry has its sectors of stocks trading very cheaply. Generally, equities priced under $1 are called penny stocks (although this definition can go as high as $5 per share). Investors gravitate toward these because of their ease of entry and explosive potential. In fact, cancer penny stocks might be the best kind of investment creating this “lottery ticket” mindset for people.
You can enhance your portfolio with cancer penny stocks, no doubt. However, you need to watch out for some common tricks these companies use to rope you in. In this article, I want to give you the scoop on how I approach assessing these equities (really, any penny stocks in biotech). Not every company is evil and out to take your money, but you will find many sharks swimming in this particular ocean.
First, I want to lay out the top reasons that people use to justify investing in cancer penny stocks. Then I want to turn to strategies you can use to avoid major losses.
Concept #1: Why People (Especially Newbies) Favor Cancer Penny Stocks in Biotech
Why should people invest in cancer penny stocks at all? What draws their attention to these, as opposed to some kind of blue chip stock? First, they are drawn by the ease of entry. In many cases, penny stocks are attractive to younger or newer investors who are starting out. These people tend to have relatively small amounts of money to play with in the beginning.
What better way to get bang for your buck? My $200 seems to go a lot further if I’m buying a stock that is worth ten cents today. A company like Merck or Johnson & Johnson seem to have very little room to grow, because they’re already so expensive. Heck, with this kind of money you won’t be able to buy more than a few shares. So what’s the point? These kinds of investors are often looking for something with more explosive capital gains potential.
And that potential cannot be discounted. You’re talking about a sector of the stock market where even climbing to a quarter could send your returns sky high…if only for a moment (I’ll get to that later). And when we start dreaming, we dream big. We imagine all the good stuff we can do if our $200 investment in a stock trading at a penny, if only they got some validation. Imagine if this small biotech was the next Merck!
Research into individual cancer penny stocks is another part of the siren song. Assuming the company has any kind of following, you will be able to find discussions online. Here, you will find all kinds of “pumpers,” individuals who appear to be true believers in the company. They promise everyone that the next huge move up is just around the corner. Dilution will never be a problem. This stock is going “to the moon.”
You’re always going to the moon with the pumpers. What motivates them? In most cases, they are investors who are in pretty deep and now married to the stock of choice. Penny stocks are not unique here, of course; you will find pumpers everywhere. However, penny stocks in particular are a breeding ground for the most aggressive, over-promising kinds of pumpers. A lot of new investors get suckered into making that initial step.
Concept #2: Why Penny Stocks Are Risky Investments
First and foremost, penny stocks live in a separate world from much of what you might consider “legitimate” investment. In many cases, they have become non-compliant with the listing requirements of the stock exchange they traded on. These vary by exchange. And these can get quite complicated. For example, you can find the listing requirements for trading on the NASDAQ on their website. To be listed on this exchange, you need to meet certain levels of revenue, market capitalization, and bid price, among other things.
Obviously, many cancer stocks do not have the product yet that they need to achieve the revenue standards. So they have to rely on meeting the standards of asset value, including a total valuation of $160 million, bid price for their shares of at least $4, and total assets worth at least $80 million. Then they must maintain a trading price of $1 per share and certain levels of equity to remain listed.
What am I driving at? Many penny stocks do not come close to meeting these standards. Specifically, by definition the penny stocks often do not meet that $1 trading value. These companies may not qualify for listing. In that case, they trade on the Over-The-Counter (OTC) market, also known as the Pink Sheets. This confers a number of benefits to the company. First, they do not have to meet stringent liquidity, revenue, or price standards.
But they also are not required to file reports with the SEC. In many cases, you’ll find pink sheet penny stocks with years of lapse in their financial reporting. They are also not governed as strictly in terms of reporting news events. Now, you can find legitimate foreign companies listed on the OTC markets, such as Roche and Nintendo. But we’ll get to why this can be an issue in a little bit.
All of this contributes to a level of uncertainty about the stock, which can make it rife for manipulation and scamming of shareholders. It’s mainly in penny stock land where you’ll find the most egregious scams in biotech. You’ll find pump and dump schemes galore. You’ll find every manner of prognosticator, from the ruthless cheerleader to the doom-and-gloom spouter, both serving their own selfish needs at your expense.
Indeed, penny stocks are the realm of the wildest swings, and if you insist on delving into these risky equities, you need to have your wits about you.
Concept #3: Guideposts for a Promising Investment
Not all penny stocks are a lousy game. If you follow some basic guidelines, you can avoid losses while indulging your desire for explosive growth. More importantly, you need to set your expectations properly.
You may not want to hear this, but I recommend you stop shooting for the moon. That’s the first guidepost, that you set reasonable, concrete goals for your investment. you need to set your mind toward what gains you want. You also need to define some criteria for backing out. The last thing you want to risk doing is becoming a bag holder.
What goals should you set? This really depends on how risky the equity is. If it’s a company on the mend, one that’s turning things around with its reporting standards and capital structure, then maybe the risk is a bit lower, and you can seek a more modest return. Now, I’m a risk-averse individual, so I would be looking to double my gains, at best. Heck, I’d be happy with a quick 25% gain on a small stake in a penny stock. Then I’d walk away, and don’t get to dreaming too heavily.
As for losses, this can be difficult. No one wants to admit he or she was wrong, but my personal breaking point is somewhere around 15%. If I lose that, then it’s time to seriously consider an exit. By avoiding deeper losses, you prevent becoming locked in a dead money situation. And make no mistake: getting locked into losses in penny stock land is a dang good way to lose your entire investment. You’ll find that 15% doesn’t hurt so badly in comparison.
Beyond that, you don’t want to just go throwing your money in any old cancer penny stock. As much as possible, you want to engage in fundamental analysis, and you want to understand the company’s platform as much as you can. Keep in mind that penny stock companies are often good at promoting themselves. Oftentimes, they’re better at promoting the possibilities of their developmental drug than they are at actually developing a drug. What’s more, it can be very difficult to get any clear information on the company’s science.
In penny stock land, you’re going to need to rely more than many other companies on your own ability to read science papers and place them within the context of the field at large. Easier said than done, of course! People like me train their entire adult lives to pull information out of these studies and critique them. Unfortunately, it’s very important to be able to do this, because you won’t find that many experts willing to give you the straight shot on the company’s science. The company’s managers have a vested interest in promoting their company. Stakeholders have their own purposes, as well. And because the stock may not have a major following, you may not find people like me who are interested in helping you improve your own understanding.
In addition to that, you need to pore through the SEC filings of the company for as many issues as you can find. Do they have a crazy capital structure with billions of shares sold? This may mean they’ll need to perform a massive reverse split. Do they have next to no cash? Then count on dilution and questionable fundraising vehicles. I highly recommend you check out my guide on what to pull out of an SEC filing if you’re not familiar with this.
Summary: Follow these guideposts, or invest at your substantial risk!
- Stick to concrete goals in your investing
- Determine the absolute largest amount you’re willing to lose
- Become familiar with the company’s science, as far away from company and shareholder spin as possible
- Become familiar with the company’s SEC filings, including their debts, capital structure, and cash situation
Concept #4: How to Spot Dangerous Penny Stocks
I cannot stress it enough: cancer penny stocks (and penny stocks at large) are very risky in general. As unsexy as they are, blue chip stocks or mid-tier growers like Novocure are probably your better bet for success.
Still, the lure of fast riches is too much for a lot of us. If that’s you, then at least become familiar with some of the tell-tale signs of a scam, or at least the signs of a grossly mismanaged company that is likely never going anywhere.
Red flag #1: The company does not file regularly with the SEC. I got into one company that did not adhere to these rules, and I will never do it again. You simply have no idea what they’re doing with your money, which almost certainly means they’re doing nothing good with it. If the company cannot keep up with the basic reporting requirements, then move on. You’ll find other companies that make it happen, even in the realm of penny stocks.
Red flag #2: You found out about the stock because someone reached out and bugged you about it. Again, move on. Anybody looking to actively sell you on a penny stock for any reason is promoting, not informing. Don’t get me wrong. Someone writing some kind of article detailing the merits of a stock might be trying to inform people. However, if you receive an email marketing campaign or see a popup ad promoting the next “cure for cancer,” don’t bother. That company is looking for suckers, not investors.
Red flag #3: You found out about the stock just as it has started to rise dramatically. This is a dangerous situation for you as a non-shareholder. Of course, you could point out that stocks do this all the time, drawing in new buyers as hype builds around some kind of major news. Indeed, but in penny stock land, the rises and falls are massive, because their low liquidity makes it easier to manipulate the price upward.
If you are interested in a penny stock that is going through a meteoric rise, hang back and wait a few days, at the very least, to see how things shake out. Be especially wary if the rise in stock price was timed “coincidentally” with an email campaign letting people know about it. You may just be bearing witness to the age-old pump and dump scam, and you don’t want to be caught in it.
Red flag #4: Management oversells their technology. As I mentioned before, management teams of cancer penny stocks are often better promoters than they are drug developers. A CEO with no experience in anything resembling pharmaceutical development, then, might be a red flag for me.
This flag is a bit of a tough one for me, though. A company that doesn’t communicate with shareholders is one not long for the world. At the same time, however, these small firms have often not made it that far in their clinical development. This means that the news they present is not the binary, game-changing stuff you expect of a pharmaceutical company. So you get a lot of “fluff.”
It could be the receipt of an award about achievements in the company’s community. Community service is great, but I don’t care about that if I’m invested in you.
It could be the announcement of results from preclinical studies, or just an overeagerness to share results at any cost. In the realm of science, you risk undermining your legitimacy by touting single patients with unusually great results. Obviously, it’s excellent that they were able achieve a remarkable result in a single patient.
But then the company is suddenly promoting that patient’s story and remarkable result? If their drug is the real deal, then they will be patient and await the validation that comes from well-designed clinical studies. A company that oversells their non-scientific accomplishments makes me very nervous.
Conclusions: How to not become a penny stock sucker
Ultimately, the best way to win this particular game is not to play. Companies and charlatans will play on your heartstrings, in the hope that they can manipulate your emotions to get you to invest further. It’s a game they know very well. And the people behind making sure you see the “golden opportunity” are very good at making you scared to miss out on riches.
Unfortunately, we are also very good at kidding ourselves. All it takes is imagining what might happen. What would it be like to have your 1000 shares of a $0.10 penny stock suddenly go to $5 per share? It has happened before. It will happen again.
Just remember that it probably won’t happen to you, not that way. So you need to overcome your fantasies and your fears at the same time if you’re serious about getting into this game. Learn to set yourself up for success with disciplined trades. Learn how to dodge the deep losses by keeping a benchmark in your head of what you’re willing to gamble away.
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