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Author: BArtagnan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 66  
Subject: Development Stage Company Valuation Date: 3/13/2006 3:01 PM
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I have been a member of Rule Breakers since last summer and I love this service (although I admit to being very skeptical about your IMAX recommendation as I purchased at $10.12 and dollar-averaged additional purchases as the stock declined to under $8.00). I enjoy reading their articles and message boards despite never having posted a message during my relatively brief history as a member.

The purpose of this note is to ask for opinions about a subject that I'm sure many of you feel is a distasteful waste of time - penny stocks. I only have $17,000 invested in the market (thanks in large part to following my ex-broker's advice about buying tech stocks during the 1999-2000 tech bubble), but I have almost fifteen years to go before I retire and a very good paying job that allows me to put aside over $1,000 a month to invest in an individual account in addition to my 10% 401K contribution.

Although the vast majority of my investment vehicles are in recommended stocks from the Rule Breakers (and the Motley Fool Hidden Gems) list of recommendations, I found out about a penny stock last summer that intrigued me and I subsequently purchased 10,000 shares at 7 cents a share. After reaching a historic high of 48 cents earlier this year, it is now trading for 30 cents. I just sold 3,000 shares at 30 cents in order to get back my original investment – so my 7,000 shares are free and clear.

I won't mention the name (since we aren't supposed to tout penny stocks) but I heard about it from my parents at a PGA golf event at which they often do volunteer work. This company (and I use this term loosely because the company doesn't have employees yet – just some very talented consultants with impressive backgrounds) is beginning to OEM the manufacturing of golf clubs and shafts this year using a space-age material called scandium. I understand that they have patents on the method of using this material in the manufacturing process.

They have also developed a shock absorption device called ShotBloc that eliminates most of the shock of hitting the ball – something that older golfers should be very interested in trying. I was allowed to shoot a round of golf with a set of these clubs and I can tell you that it was the best round I've had in years. These clubs were really incredible in reducing my slices off the tee. The clubs are a bit expensive for my current situation, but I will definitely be getting a set when I can justify the expense. In addition - they compete in an industry that relies on producing clubs with titanium, so they have a big competitive advantage if they can prove the superiority of their scandium equipment. To that end, there have been numerous recent articles written about their product in major golf magazines.

Recent independent tests have proven that, in addition to being much lighter and stronger than titanium, clubs made with scandium are 30% more accurate than standard clubs because the club head can be molded with a more acute curvature due to the additional strength of the metal. The PGA just approved the scandium clubs for use on the PGA tour and there are over a dozen tour professionals that have already had clubs custom made for their specifications or are in the process of having clubs re-shafted or custom built. The company is also putting a lot of emphasis on marketing efforts with a PGA tour van and a recent announcement that they will be driving a ball into outer space from the space station this spring (to commemorate Alan Shepard's moon shot).

The company hasn't made a profit yet, but this will be the first year that they will be distributing clubs to stores and to professional club makers. They just received almost $500,000 in capital from a bank to finance the development and production of these clubs. They also have some high profile consultants that have been added since I purchased my stock. In particular, their newest consultant is a former top executive with Tommy Armour Golf, a manufacturer of golf equipment that increased its bottom line ten-fold under this gentleman's direction.

Although this is my first taste of owning a penny stock, I certainly don't intend to allow my good fortune to influence future investment decisions – but I would like to get some advice on what to do with this stock. My question is what I should look for in determining the long-term prospects of a company with an excellent product – but no employees? How would you quantify the performance of a company in their development stage?

~Bob
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Author: DrunkenMic Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44 of 66
Subject: Re: Development Stage Company Valuation Date: 3/31/2006 6:15 PM
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Hmmm, im just curious as to the name of the stock. email me : jjq_enterprises@yahoo.com ;-)


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Author: jimpiccard Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 48 of 66
Subject: Re: Development Stage Company Valuation Date: 4/18/2006 9:39 AM
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Like you I also bout TASR for around $7, and intend it as a long-term hold. The negative news just got overdone; and I personally think it was a great idea for them to start making known how TASRs are really getting used in the real-world almost weekly (if not more), ending situations a lot more favorably and with less risk than with a gun. Their 'just the facts' posting of such news, coupled with the favorable on-going lawsuit record, is helping the street see them in a more favorable light.

The one bug I'd like to put in your noggin' is: are such stocks that we normally play around with in our regular portfolio, appropriate for an IRA? It depends on where you are relative to your IRA, I guess. For me, in my early 50s, it's still a ways away. Still.......the one way I convince myself that it's ok for me to 'play' with my regular portfolio, is because I ensure that my retirement accounts are not at such relative risk. For me, 401-k type or IRA investments fit fit a couple of criteria:

#1: They have to be around. Even stocks I consider "stable', or unlikely to ever suffer a major adjustment downwards, are not ok for my IRA. I don't want to have to worry about what is in my IRA already== ever. (Well, not until closing in on withdrawing the funds, anyway).

#2: Diversification. And by diversification I mean accumulating a retirement portfolio over time that:
- is not concentrated in any one area; and I include S*P 500 tracking funds as 'just one area'. We've all seen that those can indeed go south, for years at a time. An S*P 500 index fund/etf should be one part...and only one part....of everyone's retirement portfolio.
- sector /industry diversification has to become greater inside your retirement portfolio, over time. After all: was anyone just ten years ago (or less) foreseeing the huge runups in commodities (e.g., copper, oil, natural gas); or in, of all things, ethanol? Or cement and concrete? The steel ups and downs?
- international diversification. This is more important now, than it was ten years ago; and will be more important ten years from now, than it is now. Compared to the rest of the world, the US economy will be 'smaller' ten years from now; more and more dynamic companies that are The Real Players will not even be in the US significantly; and the US is building in some economic 'disaster' scenarios with our huge double deficits. The dollar ain't gonna be what it used to be, either.
I think history will end up record something like: "The US dollar continued as the 'currency of choice' in the world far longer than the weakening fundamentals of the United States justified. But after having been the stalwart for so long, it had it's own 'quality momentum'. However, when this in-supportable 'dollar bubble' finally burst in 2012 (or whatever!!), it did so with a vengeance; and the US currency was never the same again, once having been knocked so solidly off its perch.....".

So, what do I personally think should be in IRAs/401ks?

1. NOT most stocks; and certainly not those that have a very legitimate real risk attached to them.
For me, an acceptable stock is something like BP. Very well run company; not amoral, as the management of the US companies tend to be; a leader early on in various alternative energies; diversified operations; etc etc. I also think oil and gas trends will continue generally up in this century, not generally down.
One must be careful even with such picks, of course. Some Americans a few years ago might have considered GM a 'stable' company in which to invest--if they weren't paying attention. And as much as I'm pro-TASR, it doesn't meet the criteria, either; not for an IRA.

2. Any IRA investment should be one that maximizes the tax-deferral benefit. So, in this criteria, something like BP, again, would qualify, with its regular (and growing) dividend; whereas TASR would not.

3. ETFs (my preferred) or index funds should be used the max out of to construct an IRA portfolio. For me, that means each year, I put my entire IRA contribution (e.g., $5k) into one ETF I select, that is among the out-of-favor sector or countries for that year. Some years Malaysia is number one in the world--which means don't pick it for that year-- some years the UK is among the worst perfformers (which means maybe pick it, if you don't already have it).

4. The selections need to eventually give you some diversification across the major currencies: the Pound (e.g, like a UK ETF); the Yen (e.g, EWJ); the Euro (several available); and the Yuan (and yes, i mean that). Oh, and, yeah--have some things in US dollars, too!

5. Debt - having some income instruments in there are necessary as well; even years before you retire, IMO. e.g, I have one IRA in the emerging markets debt IRA. Sounds risky? Well, yeah. BUT....it's an ETF, across many countries, not just one; the debt interest rates still stay higher than the US, Japan, etc. And again, it maximizes the tax deferral aspect; and the pesonal risk is mitigated by the fact that I bought into it for just one years' of IRA contributions...and then let that one sit. Forever.

6. REITs -- same thing. One mistake commonly made in REITS is the belief that 'real estate' is just one thing; and in any one year or set of yars it is either all up, or all down. But that over-simplifies things. REITs themselves are further subdivided into sectors; and, as one might guess, those sectors don't move in unison. You can have a glut of class I office space, for example (which would hurt something like EOP), while owner homes can be in deficit in one area (but not another); which is not the same as a rental housing REIT; which is not teh same as a storage REIT; which is not the same as medical properties REIT; which is not the same as a hotel REIT; which.......oh, well, you get the idea.

Even when 'real estate is on a tear" some sectors are not; yet they too will have their days again.

The bottom line is: for each and every year, there is something you don't have in your retirement folio that you should have some of, that is also down/out of favor for that year. Often, with some research, you can find the best of breed ETF or index fund that covers that area...and buy into it that year for a whole lot less risk than buying any individual stock would give you. And there will even be more choices available next year; and the next, etc. And I've usually found that the ETF/Index Fund with the lowest fees, is often the 'highest quality' one, as well!

I'm just counselling that with so many investment vehicles available...it is important to not treat your retirement nest egg like your regular portfolio. In fact, one might argue they should be judged by almost exactly opposite criteria. Don't build the same level of risk into your retirement portfolio that you accept with your 'regular' or trading portfolio.

cheers,

jp

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Author: jimpiccard Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50 of 66
Subject: Re: Development Stage Company Valuation Date: 4/24/2006 8:14 PM
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I really wish I had had your maturity of mind enough to start thinking about investing directly in stocks. I never even considered it till 1990-- at age 35. Way behind the power curve I now know I should have been on.

jp


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