Penny stocks represent the “Wild West” of investing in many cases, with loosely regulated exchanges and little oversight by regulators. In some cases, penny stocks that haven’t traded for years are suddenly bustling with trading. These events can be caused by a number of factors including speculation, stock promoters, and sometimes, coincidental events that produce big misunderstandings.
In this article, we’ll take a look at how a few big misunderstandings led to massive rallies in penny stocks and what ultimately happened to the investors involved.
Investing in the Wrong MyRA
President Obama unveiled plans to create a new “MyRA” requirement account designed to help millions of U.S. citizens start to build a nest egg. The accounts would be targeted at low- and middle-class citizens that don’t have access to employer-sponsored retirement plans, covering about 75% of part-time workers. Thousands of people began searching for MyRA information following the broadcast.
The sudden interest in MyRAs also sparked interest in an aspiring destination resort company trading under the ticker symbol “MYRA”. Myriad Entertainment & Resorts Inc. (OTC: MYRA) trades with a market capitalization of just $25,000 with a “Caveat Emptor” designation on OTC Markets due to a lack of current information, but its association with the term “MyRA” ultimately led to a big misunderstanding.
On January 17, 2014, nearly a million shares traded hands before the State of the Union Address on January 28, 2014. The stock soared several hundred percent in the days following the televised broadcast with over 333,000 shares trading on the 29th, about 500,000 shares on the 30th, and 400,000 shares on the 31st. While the stock soared higher for a time, it eventually crashed to pre-MyRA levels.
Google Bought Nest not NEST
Google Inc. (NASDAQ: GOOG) announced the acquisition of Nest Labs for a breathtaking $3.2 billion on February 7, 2014. Google revealed that it would make the acquisition back in January of 2014 in order to enhance its suite of products and services. The thermostat and smoke alarm manufacturer had become famous for enabling consumers to better control temperatures and manage alarm noise.
While Nest Labs was a private company, Nestor Inc. (OTC: NEST) was the natural search result when investors were trying to identify the company. On January 13, 2014 when the acquisition was first announced, shares of the micro-cap stock soared from $0.002 to $0.04 per share with more than 2,265,000 shares trading hands on the first day and several million more over the subsequent days.
Of course, Nest Labs and Nestor are two different companies and the stock eventually fell back to $0.02 per share. Interestingly, the stock remains at those levels to this day—substantially higher than its pre-Nest Labs valuation of $0.002—despite the fact that investors have likely realized their mistake. The company last traded with a market capitalization of just over $580,000.
What Does that Q Mean Anyway?
Twitter Inc.’s (NYSE: TWTR) initial public offering (“IPO”) certainly attracted a lot of attention. The stock soared almost 73% above its offering price on the first day, reaching a high of $50.09 intraday, representing a 93% premium. But Tweeter Entertainment (OTC: TWTRQ) had an even more impressive debut a bit earlier, surging nearly 700%, despite the small fact that it was in bankruptcy.
Tweeter Home Entertainment was trading under the ticker symbol TWTRQ—the “Q” signifying that it was in bankruptcy proceedings—when Twitter Inc. made its IPO filing back in October of 2013. The bankrupt retail chain’s stock surged nearly 700% higher before the financial industry’s self-regulatory arm halted trading shares amid the confusion.
The confusion was resolved when Tweeter Home Entertainment received a new ticker symbol that was less confusing – THEGQ. Since reaching a high of around $0.15 on October 4th, 2013, the stock has since moved down to its current levels of around $0.0002 per share [see also 25 Stocks Day Traders Love].
Google’s $400 Million Wi-Fi Hoax
Many investors wouldn’t be surprised to hear that Google Inc. (NASDAQ: GOOG) spent $400 million to acquire a Wi-Fi hotspot operator. On November 26, 2012, the technology giant announced just such an acquisition of a company called ICOA Inc. (OTC: ICOA) – a sub-$1 million company trading on the Pink Sheets. The 40,000% premium sent shares of the firm sharply higher with 330 million shares traded.
Of course, Google probably wouldn’t waste its time acquiring a sub-$1 million company to build out hotspots. Upon closer inspection, the press release also contained a number of grammatical errors and suspicious statements like, “Google looks to further diversify it’s already impressive portfolio of companies.” The press release ended up being a hoax that cost many investors a lot of money.
Shortly after investors realized the mistake, ICOA shares moved sharply lower and now trade at just $0.0001 per share. The press release was subsequently retracted and law enforcement was brought in to investigate the matter. At the time, many parties suspected a dubious stock promoter of putting out the press release in order to profit from the rise and fall of the stock over the short period of time.
The Bottom Line
Penny stocks are the closest thing to an unregulated corner of the stock market, seeing as how many different factors can lead to big moves in these thinly-traded securities without any good reason. In these cases, certain coincidences or outright frauds led to substantial rallies that ultimately left investors at a loss. Most investors should stick with blue chip stocks for their portfolios and let the seasoned speculators deal with these smaller and more volatile companies.
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