Here’s One Small Stock To Avoid

| March 30, 2010

I spend hours every day monitoring the markets.  A big portion of my time is spent reading up on companies and researching economic trends.  A lot of the research is uneventful… however, every once in a while I come across something really interesting.

Something that’s just too good to pass up…

And I uncovered that interesting tidbit of information recently.  Here’s how I found it…

In my article last week, I introduced one of the most popular Tennessee moonshiners – “Popcorn” Sutton.  Popcorn got his nickname from a run-in with a popcorn machine.  Back in the 1970s, he apparently beat the tar out of a popcorn machine with a pool cue.

The reasons are a bit blurry I imagine, but any way you slice it, Sutton put that popcorn machine in its place.  And he’s been known as Popcorn ever since.  (You can insert your own popcorn joke here!)

While researching Popcorn and his moonshining ways, I began reading about the distilling industry.  I started looking at industry trends, reading recent press, and studying earnings releases.  I researched a few of the big boys in the industry.  Then I picked a few smaller companies to focus on.

Needless to say, the process took a bit of time.

One company popped up on my screen and it only took me 30 seconds to realize I should stay away from this stock.  Here’s the problem.  The company is a penny stock and it’s trading at only $0.02 a share.

Many investors buy these damaged stocks and consider them a lottery ticket.

How bad can it be if you pick up 50 shares for a single dollar?

Look, if that’s your strategy, no problem.  You understand the risks and rewards of investing.  However, with this stock, I don’t think it’s worth even classifying in the lottery ticket category.  This stock isn’t worth the two pennies being asked for it.

The company is Drinks Americas Holdings (DKAM.OB).

Now I normally don’t focus on the negative when it comes to little companies like this… they have enough of a struggle already.  However, I was digging through the company filings and what I found made me mad.

Before I tell you what I found, first a little on the company.

Drinks Americas has a simple business model.  They create premium spirits in conjunction with well known celebrities.  For example, they sell Trump Super Premium Vodka, Willie Nelson’s Old Whiskey River Bourbon, and Kid Rock’s BADASS Beer.

Pretty simple model.  The more booze they sell, the more money they make.

Unfortunately, the stock’s cratered in the last year.  No problem, the adult beverage business has been a difficult one.

That’s not what got me so worked up.

I took a look at the company’s financials and in the last nine months, sales plunged from $2.2 million to just over $846,000.  And gross profit is a mere $236,000 (clearly they’re losing money).  Ok, times are tough.  What made me mad was the company’s wasting $3.8 million on SG&A.

For those of you who don’t know, SG&A stands for Sales, General, and Administrative expenses.  This includes things like employee wages, marketing activity, and travel costs.  It also includes management salaries… and that’s what makes me mad.

While the company is losing money hand over fist, the CEO is paying himself $300,000, the COO gets $175,000, and the CFO got a pay raise to $145,000.

The company has negative cash flow.  They keep diluting shareholders by issuing stock to bring in cash for operations… yet while the company struggles, management’s living high on the hog.

So these three guys are collecting more than $620,000 a year for running a company into the ground.  Are they kidding?  Don’t they realize this is shareholder money?

That makes me more mad than anything else… and I didn’t even touch on the debt defaults, the former employee lawsuits, or the sale of unregistered securities…

Look, just stay away from Drinks Americas Holdings… even at two cents a share, it’s overvalued!

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Category: Penny Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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