Two Stocks I Like - Penny Stocks

The two stocks featured here are speculative plays. Neither company is currently netting a profit. Put another way, there is a very real possibility that these companies could fall into bankruptcy. Neither company has conclusively proven that their business model works. Nonetheless, these companies are innovative enough, and have enough “real” earnings potential to warrant some consideration. I own both.
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U-Food Restaurant Group (UFFC, OTC) www.ufoodgrill.com

U-Food Grill is a fast-food restaurant chain that focuses on healthy fast food: organic rice, low-fat cheeses, whole-grain breads, hormone-free lean meats etc. Their menu includes U.S. staples such as burgers and fries (baked), wraps, rice bowls, and salads. They currently have 10 locations in the U.S.

U-Food Grill’s official spokesperson is former heavyweight champion George Foreman, whose image is everywhere. George Foreman fits in perfectly with the healthy image of U-Food, as well as the “healthy grilled food” concept made famous by his George Foreman Grill.

U-Food initially got killed during the credit crisis, as its prices were significantly higher than traditional fast food outlets (between $8-14 per meal). Now, their prices are in line with other fast food restaurants ($5-10 per meal). The recession also, I think, helped U-Food define its long-term strategy. They recognized that their restaurants do best in areas with above-average incomes, or where there is a real demand for healthier fast food. In response, U-Food is now focusing on opening restaurants in hospitals and airports.

Stock Price (at time of writing): $0.073 USD

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HearAtLast Holdings (HRAL, OTC) www.hearatlast.com

This company is a Canadian-based retail store with 28 locations, specializing in mid- to high-end hearing aids. HearAtLast formerly opened small shops that competed with local hearing aid stores, but changed its strategy a couple of years ago, choosing instead to be co-branded with a large retailer: Wal-Mart Canada.

I visited HearAtLast’s location in the Wal-Mart megastore in Westbank BC in 2009, and got a tour of the location from the local manager. Customers who suspect hearing trouble start with a simple test using a set of headphones. If their hearing is not perfect, an appointment is made for a rigorous test in a sound-proof booth (located in back). If necessary, an appropriate make and model of hearing aid is afterward presented to the client. The store was clean, sharp, high-tech, and located right at the entrance & check-out area. Perfect.

Stock Price (at time of writing): $0.0585 USD
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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

U.S. Robin Hood Real Estate

This week, President Obama announced revisions to the mortgage bailout program, giving the hardest hit states additional support. But when clients can’t pay – or simply don’t want to pay – will modifications help? For many of these borrowers, it was all-or-nothing from the beginning.

Back in June of 2007, customers would walk into my office saying, "I'm going to buy this house, redo the roof, sell it, and make a hundred grand!!” (During a bubble, people never say “thousand.” they always say "grand.") “But,” they would add, “we have to do it right away, because this market won't last forever!" Other clients would admit, "I don't have the money to buy supplies for renos, so I'm going to buy them on my credit card. It’s no problem. I’m going to flip the place in a month anyway."

In other words, people were intentionally making financially dangerous decisions, knowing full well that they were buying into a bubble. I saw little of the innocent “I didn’t understand the paperwork” crowd that made appearances on TV later on. And when I declined their mortgages, they got angry: "If you won't give me the money, I'll just go to someone else who will!" (I was, after all, denying them their once-in-a-lifetime opportunity to get rich.) If you're 40 years old and your only assets are a Harley-Davidson and some tools, why not risk everything? After walking out of my office, they probably went to a high-risk lender, got approved, and then our bank stupidly bought back their mortgage through a CDO.

Now we are giving them more money. I would like to see the U.S. housing market recover more quickly, just like everyone else. But instead of setting a dangerous precedent, the Government should continue to increase productivity through infrastructure renewal, keep interest rates low, and wait until the market drops low enough for the savers (of which there are many) to buy the homes. That is, stop bailing out gamblers and let the market work itself out.

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Gold, Finger

Nothing excites people like gold. It is malleable, shiny, never loses its luster, and looks great around a girl’s neck. It is the stuff of legend, where a new discovery can make a man rich overnight. Gold is now at record prices, and the airwaves are inundated with ads to buy gold, sell gold, and invest in gold. What do you get when you combine beauty, excitement, and instant riches? Why, a great opportunity to scam investors, of course.

The typical gold mining scam follows a theme with common elements. The first of these is a great story. Maybe the speculative property is an “overlooked” piece of land next to one owned by a large mining firm. Maybe the owner went bankrupt and had to sell it on the cheap, regardless of its true value. Maybe the story combines a bit of everything.

I attended a seminar of a TMX-venture listed company a couple of years ago that nicely illustrates the “story” portion of a gold venture. First, the meeting place itself. The conference room was supplied with boxes covered in gold foil (each of which, I was told, represented one metric tonne). On the tables were gold vases and gold foil chocolate bars on gold tablecloths. But aside from flair, this presentation had a great story.

As I soon learned in a video, an old prospector (we’ll call him “Yukon Bob”) had a gold mine. The mine was so successful that he made a living at it using only a pick, shovel, and some occasional dynamite. It was this dynamite that proved his undoing. Yukon Bob’s beloved mine collapsed upon him, killing him instantly. That was about a hundred years ago. The family kept the property, but did not mine it in memory of poor Yukon Bob. Our heroic CEO convinced the family to sell this accursed mine to him for a small sum, just to be rid of it. Great story.

After hearing the tale, I perhaps didn’t look as excited as I might. The CEO noticed this, and immediately sent over a honey trap. Sitting uncomfortably close for a room full of people, the lovely lady asked me what I do for a living. Upon saying, “banker,” I thought I could see drool form at the edges of her mouth.

The other part of their story, which is typical of gold-mining presentations, is the quality of management. Having nothing but a hunk of land and an office somewhere, the company will tell you how management is “well respected” in the industry, and has “100 years” of experience between them.

A truly really great opportunity (you will hear) is when the company has not yet gone public. They will hint that if you invest now, the eventual IPO will make you rich whether the company finds gold or not. Not mentioned is that in the meantime, the CEO and directors will pay themselves nice six-figure salaries using your money until, hopefully, the company goes public as planned. At the peak of the hype, the owners will sell most of their shares, leaving penny stocks that will eventually get bought out by still more promoters, at which point the company’s name will change. This is why venture companies often have press releases for names that read like a play-by-play of what is hot in the market; for example, “Super Wind Alternative Energy, formerly known as Capsule Biomedical, formerly known as BuyIntoIt.com, has changed its name to Gold Sierra Cortez Inc.”

Then there are companies that tell you the truth, but neglect to mention the downside risks. Take for instance, a company that made a great gold discovery in Peru. The core samples showed excellent potential. The mineralized area was close to the surface, in rock that was easy to mine. All great so far. What the promoters neglected to mention was that the property is commercially inaccessible except by helicopter, that local prospectors frequently get kidnapped and held for ransom, and, oh yes, the small matter of the thousands of land mines.

Of course, some companies actually do search for gold, and some even build mines and strike it rich: probabilities, however, are not on your side.

The “golden rules” (pun intended) of investing in venture mining companies are as follows: first, if you want to invest your money, choose companies that are either in the process of building a mine or where production has already started – this alone with weed out the 95% of discoveries that never pass the feasibility stage; this should be the start of your research, not the end. If you want to speculate, there are almost no rules save one: don’t commit a penny more than you don’t mind losing.

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“Oh, the only gold I know about is the kind you wear... you know, on the third finger of your left hand?” Miss Moneypenny to James Bond, Goldfinger, 1964

The Canadian Housing Bubble – The Denial Continues...

I could talk about the Big 5 Banks’ meeting with the Bank of Canada, where they expressed concerns about a potential collapse in real estate prices. I could talk about rising mortgage debt as a percentage of income. I could talk about condo developments in areas with an abundance of rental suites available. I could talk about the increasing incidence of fraud. But, I think the bare facts speak loudest.

This home in Vancouver –for sale at $1.18 million.


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“Right now, there is no compelling evidence of a housing bubble in Canada." Jim Flaherty, Canadian Finance Minister, Feb. 2010
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The US Economy: Rise of the Grim Reaper Crowd

Buy canned goods, ammunition, bottled water and batteries. Capitalism is over and the United States of America will soon become a socialist state, with scattered regions of anarchy and bloodshed. At least, that’s what you’d think by reading the newspapers. And what’s causing all this? In a word: uncertainty.

Wall Street hates uncertainty (read “change”) and loves to worry about it. And the current administration is, well, changing things. There is talk of financial regulation, limiting CEO pay, changing healthcare, changing education, and more. And it isn’t just in the United States, either. Formerly democratic countries like England are talking about raising educational standards, improving infrastructure, and combating climate change. Aargghh!! So much change!

Hard-core industrialists cannot fathom why anyone would purposely reduce corporate profits merely to achieve such vague goals as “clean air.” In the Jan. 2010 edition of Resource World, a Canadian mining investment magazine, Leonard Melman writes: “It would appear that the public will not tolerate the abandonment of their favourite social, environmental, medical or educational goals, just to create industrial efficiency or financial balance.” I’m not making this up.

Reality is slightly more benign. Home prices in the U.S. have finally dropped back to prices affordable for the average family. Personal savings rates (and the repayment of debt) have improved to levels not seen in decades. Interest rates are low. Stock prices are reasonable. Bank spreads are glorious. And to top it all off, huge amounts of frightened personal cash is still sitting in savings accounts, GICs, and money market funds. The United States has taken its necessary dose of suffering, and is fully poised for a comeback.

Nevertheless, it’s fun to be scared. Recent blog posts on CNBC use talk like, “America is not coming back,” “The political class exists to create and extend ‘war’ between groups of Americans,” and “I am worried about the plotocray we have become.” I’m not sure what a plutocray is, but it must be bad.

All this talk of regulation and rules… If Henry Clay Frick were here, he’d know what to do: he’d send Pinkerton’s into Congress and be done with it.

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""Tell him I'll see him in hell, where we are both going." Henry Clay Frick, to Andrew Carnegie on his deathbed.

Chinese-Style Bao Ba

A quick and dirty definition of a bubble is when, a) everyone thinks that an asset is overpriced, but b) they want to buy it anyway.

This is precisely the situation in China, where, according to state news agency Xinhua, 86% of investors believe that a housing bubble has begun; yet 92% expect prices to remain steady or rise. On average, investors expect a gain of 4.4% per quarter, or 17.6% per year! Recent adjectives used to describe the Chinese housing market include “rocketing,” “sizzling,” “surging” and “searing.” In capital city Beijing, a 950 sq ft apartment costs the equivalent of $2.8 million dollars to an American (roughly 0.65 month’s salary per square foot). And if all that were not enough, the General Office of the State Council (Jan 16th) issued a report noting that “excessively rising house prices have recently emerged in some cities,” and recommended “restraining purchases for speculators and investors.” Ouch!

When something is this obvious, it’s painful to watch.

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“One clear indication of a bubble is the rapidity of the price rise. Although there are occasions when sharp increases in the price of individual stocks are justified, this has never been true of market sectors.” Jeremy Siegel