7 Deadly Penny Stock Sins

Whatever happened to sin? Brad Pitt didn’t fare so well in the movie Se7en… granted, Gwyneth Paltrow fared even worse. Still, that doesn’t mean your penny stock portfolio needs to face the same fate.

During a recession (and dare I say in other times as well) sin stocks tend to do better than the market at large. “Sin stocks” of course are those companies that operate in activities that some people may consider sinful; including the distribution or production of alcohol, tobacco, weapons, and sex-related products.

After all, when times are tough, people might drink a bit more, smoke a bit more, maybe even gamble a bit more. Now, if you’re a strong proponent of socially responsible investing, sin stocks probably won’t be up your alley.

Don’t get me wrong, there are lots of advantages to investing in “clean” companies. But if your subjective moral compass allows it…you may just find that if there is one aspect of society that has endured the test of time, its sin. And if there’s one thing I’ve learned from watching Wife Swap, it’s the importance of balance and moderation.

That said, not all sin (or vice) stocks have stood tall during this current recession. The Vice Fund recently reported that it was down 42.83% for the year ended March 31st, 2009 — measurably worse than the category average of 38.13%.

Still, as penny stock investors we aren’t looking at high flying sin stocks – our options are a little more…refined. Further, very few funds cater to penny stock investors. This is unfortunate when you consider how many stocks are now trading in the penny stock range.

I digress, the point is, recessions don’t stop gamblers from betting, partygoers from drinking, and smokers from puffing. In fact, economic turbulence might give them even more reason to indulge. Or rather, find other ways to relax.

This makes so-called sin stocks, or shares of alcohol, gaming, tobacco, and adult entertainment companies, a safer bet as the U.S. economy slows. Or at least some of them. Not every sin stock is basking in the sunlight of the recession. But I have found a number that are.

Having said that, I cannot vouch for their fundamentals, management or cash position. These are sin stocks operating in an economic climate they’ve been groomed for.

I’m just here to show that there are indeed a number of vice penny stocks whose share price has experienced tremendous growth over the last month or two. Do they still have room to run? Who can say? Only your due diligence can answer that one.

Gambling – What happens in Vegas doesn’t have to stay in Vegas. Shuffle Master (SHFL – Nasdaq) makes automated card shufflers and other gaming machines. Everybody thinks the economy is bad, but it’s not that bad in Las Vegas. In early March SHFL was trading for as low as $1.97, and on April 17, the company hit an intra-day high of $4.12; for a short-term spread of 109%.

Strong double digit revenue and earnings growth has been helping Electronic Game Card, Inc.’s – (EGMI – OTCBB) share price gain steam. A provider of electronic software for lottery, casino, sales promotion, and incentive markets, on March 12, EGMI was trading for as low as $0.25, and on April 7, the company hit an intra-day high of $0.82; for a short term gain of 228%.

Alcohol – How dry I am. The profitability of beer, wine and spirits has been something that companies have been capitalizing on for hundreds of years. And Craft Brewers Alliance, Inc. (HOOK – Nasdaq) is trying to carrying on that tradition.

With company shares recovering from post-merger lows, insiders at Craft Brewers Alliance Inc., the makers of the Widmer Brothers and Redhook Ale brands, have been buying the beer company’s stock. ON March 11, HOOK hit an intra-day low of $0.85, and on April 23, it hit an intra-day high of $2.30; for a 6 week gain of 170%.

Weapons – Be all that you can be… While Norsat International Inc. (NSATF – OTCBB) isn’t a firmly entrenched “sin stock”, it is a company that will be on the front lines in the event of a terrorist attack…and probably not a penny stock your average pacifist would be keen on.

NSATF is a leading provider of intelligent satellite solutions that enable the transmission of data, audio and video via satellite in even the most challenging environments. Customers include the United States Department of Defense, Marine Corps, Army, Navy and Air Force; FOX News, CBS News; Boeing, Reuters and others.

NSATF recently reported strong year end financial results, has a solid cash position and no long-term debt. On January 15, the company was trading at $0.32, and on April 9, it hit an intra-day high of $0.75; for a 3 month gain of 134%.

Sex – Sex sells – enough said. The sex industry is so enormous and much of it underground, that it is hard to find precise industry figures. But in recent years a number of companies in the industry have gone public. Thanks to the Internet, the sex industry has added a whole new dimension to this business.

Penny stock investors looking for more than just a glass of beer at their local bar can buy shares in Rick’s Cabaret International (RICK – Nasdaq). RICK runs strip joints in Texas and Minnesota, as well as erotic Websites. In early March RICK was trading at $2.44, and on April 4, it hit an intra-day high of $5.97; for a 1 month gain of 144%.

Boulder, Colorado based New Frontier Media (NOOF, Nasdaq), offers penny stock investors a piece of the action in pornographic films via adult cable TV and other systems. In early March NOOF was trading at $1.05, and on April 23, it hit an intra-day high of $1.95; for a healthy one month gain of 85.71%.

And lastly, we have Private Media Group (PRVT – Nasdaq), a company that distributes steamy films and pictures. Over the last month, PRVT has seen its share price climb 50% from a low of $0.92, to a high of $1.38.

Not all sin stocks are recession-proof; while some have profited greatly, others have proven to be just recession-resistant. And that’s not such a bad thing when you look at the markets as a whole.

Why invest in sin stocks? Like all penny stocks, it’s all about returns. By neglecting penny stocks companies within these industries you may restrict your portfolio’s ability to make some solid gains.

Is there more to buying penny stocks than finding loyal customers to boost your bottom line? Is it ethical to keep on taking a gambler’s money even though he has a serious problem? What about selling beer to an alcoholic?

There are no easy answers. And like all investing options, the subjective choice is up to each and every penny stock investor.

John Whitefoot is a seasoned penny stock investor with a keen interest in international business and current affairs. John Whitefoot is Sr. Editor at http://www.pennystockinsider.com and is devoted to uncovering the news, trends, and ideas that affect penny stocks on a daily basis.

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