About Me 0128: Stock Making Money

It might have caught some onlookers at the Consumer Electronics show by surprise to see 50 Cent hawking a brand-new pair of headphones from a publicly listed penny stock distributor called H&H Imports, Inc. But after promoting its goods on CNBC and plugging the company to his 3.8 million Twitter followers, 50 Cent managed to make H&H Imports $50 million in one day, with the stock closing at a 240 percent jump yesterday. Go ahead and switch the style up. And if they hate then let 'em hate and watch the money pile up. Yesterday the rapper took a step back from the company in which he (and G-Unit Brand) invested $750,000 in shares and warrants in November, after details emerged about the company's potentially shady financials, especially in the high-risk realm of penny stocks, which trade at a low price and not on major market exchanges. Last year, the company lent $141,000 to "an entity in which our Chairman's brother is an officer and owner." It also claimed more than $1.3 million in losses in the last quarter despite short-term working capital loans from its CEO. H&H might not even specialize in headphones. Its Bloomberg profile describes the company as engaging "in the wholesale purchase and sale of women's handbags."

After yesterday's huge jump in stock, the rap mogul tweeted a word of caution to his eager Twitter followers, "I own HNHI stock thoughts on it are my opinion. Talk to financial advisor about it." Followed shortly by, "HNHI is the right investment for me it may or may not be right for u! Do ur homework." But hours after the warnings, he continued to retweet bullish followers, who crooned about his taking "the stock market to new heights. Talk about making history again! AND YOU KNOW IT" or being "The man of the century" for having, "Nice business moves &stock investments." As of about 10 a.m. this morning, the stock is down 20 percent. He, he get money. Even if you lose yours.

Get Rich or Die Tweeting: 50 Cent Plugs Sketchy Penny Stock, Shares Skyrocket [NYO]

50 Cent's Tweets Make A Staggering $50 Million In One Day [BI]

50 Cent Cautions Investors His Penny Stock May Not Be Right for Them [NYO]

[50Cent/Twitter]

My guest on Hedge Fund Radio this week is penny stock trader and Internet entrepreneur, Tim Sykes. Every once in a while I run into a natural born trader, someone who crawls out of the crib quoting options spreads, price earnings multiples, and book values. His first spoken word was “Sell!” While other kids were practicing their ABC’s, Tim was pouring through prospectii.

During his college years, Tim skipped classes and turned a $12,415 Bar Mitzvah gift into $1.65 million by trading the market from his dorm room. By the time he graduated from Tulane in 2003, he was already running his own hedge fund. Barclays Bank rated it the number one short bias fund during 2003-2006.

Tim argues that if you cut through all the hype and manipulation in the penny stock market, it is clear that there are huge opportunities on the short side. Most of the companies trading there are frauds, and most will fail. Mini Enron’s and mini Madoff’s abound.

Defined as trading under $5 a share, these stocks are purchased mostly by individuals desperate for “get rich quick” success. Promoters buy lists of email addresses from major online publishers, sometimes paying millions of dollars, to launch a never ending onslaught of “pump and dump” schemes. Email barrages and Twitter spam have replaced the dinnertime telemarketing calls and junk mail of yore.

The SEC is so inundated with tips on Madoff copycats and competitors ratting out each other, they don’t have time to pursue gripes about $1,000 losses emanating from penny stock scams. It’s like expecting the FBI to pursue shoplifters of 99 cent items from Seven Eleven stores.

Some of the claims made by these bogus IPO’s boggle the imagination. Tim’s favorite was one company’s efforts to promote vitamins infused with stem cells. Another offered a solar spray that turned you house into an energy source. Then there was the BP Gulf oil spill that threw up innumerable crude eating forms of algae. As for my own experience, I’ll never forget the aquaculture farm in the middle of the Saudi Arabian desert. To separate out the obvious rip offs from the legitimate companies, Tim spends hours a day gleaning through voluminous SEC filings, some of which are blatant cut and paste jobs from earlier failed floatations.

Even though most of these companies are fake, prices can run away to the upside, wiping out the early short sellers. So some risk control discipline is required. When a stock truly rockets, “buy-ins” of shorts can also be a problem. A few hundred penny stocks are launched each year, but only about five a month catch on fire. And remember, Apple (AAPL), and True Religion (TRLG) jeans were once penny stocks.

To avoid being taken to the cleaners by unscrupulous con men, Tim offers some very basic advice. If it is too good to be true, it generally is. It also helps to read the SEC filings, which can be obtained online for free.

Tim claims to have a success rate with his short strategy of 75%, which has delivered a 56% return in 2010, proving he still has the golden touch. His problem is that the strategy is not scalable, and can only be executed with a small amount of money. No mega hedge fund for him.

That’s why Tim has turned to online education instead of ramping up a big hedge fund. Today, he is offering several subscription newsletters, trade alerts, chat rooms, along with a DVD course on making money in the penny stock market at his website at http://www.timothysykes.com/ .

To listen to my highly informative and entertaining interview with Time Sykes on Hedge Fund Radio, please click here at http://www.madhedgefundtrader.com/december-22-2010-time-sykes.html .

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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Thursday, January 13, 2011

Stock Making Money

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