Cheap Stocks: How You Recognize An Energy Stock SCAM!

| February 11, 2015 | 0 Comments

Cheap Stocks Like FROT Are A Disaster Waiting To Happen

In late 2014, I told you about a glitzy stock promotion I received from my postman.

The flashy write up was filled with enough savory profit figures to make the most seasoned investor drool.

According to the publisher of the unsolicited report, Falcon Ridge Oil Technologies (FROT) holds a proprietary drilling technology that’s ready to revolutionize the oil and gas drilling industry.

Was it the real deal?

One look at the company’s financial statements and I knew there was something fishy with FROT. In case you missed my first article on the company, you can find it here.

Now that a few weeks have passed, let’s check back in with FROT…

Cheap Stocks can be dangerous, a chart of FROT

As you can see, the stock suffered a spectacular crash since my December 17th warning article.

How did I know?

Let me show you…

How To Check If Cheap Stocks Are The Real Deal

Without question, cheap stocks trading under $1.00 a share like FROT offer the potential for big gains. If you catch the right stock at the right time, you can literally make a fortune.

But you have to be realistic…

A large portion of cheap energy stocks trading under $1.00 have little chance at big gains, especially ones being purveyed by unsolicited promotional mailers.

That’s why you always check a company’s financial statements before investing a dime!

While the income statement and balance sheet can be confusing to those without accounting experience, they hold very basic information that will give anyone a clear sign if a company is legit or not.

First of all, look at the revenue the company is bringing in… 

You’ll find this important metric at the top of the income statement. Revenue is simply the amount of money a company brings in through sales during a specific time period.

In FROT’s case, revenue was a paltry $3,000 in the period ending November 30, 2014.

Folks, $3,000 of quarterly revenue is an embarrassment for a company claiming to “hold the key to the entire future of America’s oil boom”.

Think about it…

When a company making such claims brings in less revenue per quarter than a single person with a minimum wage job at McDonald’s (MCD), red flags should be popping up in your head.

The next item to look at is selling, general, and administrative (SGA) expense.

This metric is just a few spaces down from the revenue line on the income statement. These are the salaries, marketing, utility bills, and other general expenses associated with running a business.

In FROT’s case, SGA expenses were a whopping $187,000 for the period ending November 30, 2014.

When you see SGA expenses outweigh revenues by such an enormous margin, warning sirens should be blaring in your ears.

After all, a company’s operating profit is determined by subtracting SGA expenses from revenue.

Simple math tells you FROT had an operating loss of $184,000 in their last reporting period- ouch!

But more importantly, the company is racking up larger operating losses with each passing quarter. Growing sequential quarterly operating losses is a clear sign something’s wrong with the company.

A Quick Look At The Income Statement Reveals A Lot!

Folks, essential income statement information takes less than five minutes to find.

Do your investment portfolio a favor and look at a company’s income statement before investing. That’s especially the case if the stock is pushed on you in an unsolicited promotion like FROT.

If you see something fishy on the income statement, simply move on to another company. There are thousands of investment options at any given moment. Don’t put your hard-earned money in a company with the odds stacked heavily against it.

But wait there’s more…

While the income statement provides crucial income and expense information, the balance sheet provides you key signs of a company’s financial health. As you may have guessed, FROT failed my balance sheet test as well.

I don’t have time to cover balance sheet basics today, but look for an article on the topic in coming weeks.

Bottom line…

Despite the juicy profit projections purported by the Moskowitz Report, FROT is still a ticking time bomb. In my opinion, it’s just a matter of time before shares of the oil driller drop to $0! 

Until Next Time,

Justin Bennett
Commodity Trading Research

BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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