Avoid These Penny Stocks Heading For Bankruptcy

| August 23, 2011 | 0 Comments

Melting ProfitsYou know, I like nothing better than to look back at a big winner in my account.  There’s no better feeling than watching one of your small investments grow, and grow, and grow.

The problem is… you don’t learn a lot.

See, one of the ways to become a better penny stock trader is to look at failure.  Analyze companies that have imploded… look at the bad penny stocks you own… and those you don’t.  Use it as an opportunity to learn from those investing mistakes.

In the last week, we’ve seen one high profile company go bankrupt… and now they’re officially a penny stock.

Who am I talking about?

None other than our friends at Evergreen Solar (ESLR).

Evergreen’s been around for almost a decade, and during the oil price spike of 2008, the stock traded as high as $103 a share!  Today you can scoop up those same shares for just under $0.18 cents.

The flameout was pretty spectacular.

For a while, Evergreen was the hot solar stock to own.  They had a technology that would allow them to manufacture solar panels quickly and efficiently.  It sounds good, but there was a problem.  They couldn’t sell these solar cells at a profit… and that’s not good.

Now my heart goes out to everyone who owned this stock.  You just watched a huge chunk of your savings disappear.  But to be honest, some of you could have seen it coming.

How?

By spending a little time on fundamental analysis, you could see why Evergreen was headed for the trash heap.  A little further digging shows the warning signs have been there for years…

The survival of a company all comes down to the most important thing a company owns.

It’s not people, technology, patents, or products… It’s cash.

Without cash, a company ceases to exist.  They can’t pay their employees, buy product, field a sales team, or cut deals.  Cash is the lifeblood of an organization… Cash is KING!

I know it sounds cliché but, in this instance, it’s the truth.

One look at the financial statements of Evergreen and you can see cash wasn’t a priority for management.

At the end of 2008, the company had more than $177 million in cash in their accounts… that fell to $112 million in 2009 and a measly $61 million in 2010.  I’m getting visions of drunk sailors on shore leave!

Now falling cash levels aren’t always bad.

But when you look at their income statement, you see where it was all going.  Cash was flying out the door as Evergreen spent more and more money.  As a matter of fact, in 2010 the company lost money every time they sold product.  Their cost of revenue exceeded their actual revenue by over $55 million.

I don’t know of anyone with a successful company selling product at a loss.

It was warning sign after warning sign.

While Evergreen is now headed for the dustbin, you should take this as a learning experience.  Watch a company’s cash levels closely.  If they don’t have enough to survive and reach profitability, you may want to think twice about your investment… unless of course you don’t mind losing money.

Remember to look around and use common sense, and sidestep any penny stocks without a good cash position.  They may be heading for bankruptcy.  Don’t learn this lesson the hard way.

Until next time,

Brian Walker

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Category: Penny Stock Tips, Solar Stocks

About the Author ()

Brian joins the Penny Stock Research team as a seasoned independent trader and financial analyst. Brian graduated with a B.S. from the University of North Florida and now resides in Scottsdale, Arizona. With a background in economics and statistics, he has a keen ability to uncover profitable and growth-focused companies. He has years of real life know-how in analyzing fundamental and technical data that gives him an edge drilling down on companies and financial results. With over 15 years trading experience, Brian has become an expert in the ever-changing equities markets. Today, he scours the markets hunting for penny stocks that offer low risk and high reward.

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