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Whose Hot Tips Do You Trust? Know the Warning Signs

Stocks in this article: SIRI NOK S TWTR

NEW YORK (TheStreet) -- Writer Richard Saintvilus says he has been approached by outsiders who have wanted him to write favorable articles on worthless stocks. He declined.

Such articles are the "pump" part of a pump-and-dump scheme. After touting a stock, tricksters dump it, leaving investors holding the bag. (Think the Wolf of Wall Street.)

TheStreet's Adam Feuerstein reports a recent case here: Galena Biopharma Pays for Stock-Touting Campaign While Insiders Cash Out Millions.

In the video above, I sit down with Saintvilus to discuss pump-and-dumpers and how one may gauge whether a penny stock has value.

Avoid Chat Room Tips

To avoid being duped, Saintvilus says investors must do their due diligence with vigor. Similar to the research one does when buying a house, if you are buying a stock, you should study the company's CEO, quarterly and year-over-year earnings and at least the fundamentals before you make any moves.

TheStreet's Debra Borchardt says investors shouldn't trust chat rooms and message boards for penny stocks. That is ground zero for starting rumors.

"Investors should stick to the facts, which are the filings, and not an anonymous tip in a message board or on StockTwits or Twitter (TWTR). If you follow StockTwits, make sure you recognize and distinguish between anonymous filers vs. people willing to identify themselves. ‚ÄčAnonymous tips tend to be suspect," Borchardt says.

In the video, Saintvilus also discusses penny stocks, and how even good stocks, such as Sirius XM (SIRI), Nokia (NOK) and Sprint (S), may trade under $10, and even as low as $5, but still retain their value.

[Read: Ocwen Shares Look Ripe After Brutal Pullback]

The Homework

Let's say you are considering Sirius XM, which has an average daily volume of shares traded of more than 66 million. The stock closed Wednesday at $3.56, down 0.28%, or a penny. That's a bit closer to the high end of its 52-week range of between $2.95 and $4.18. The market cap is more than $21 billion.

On Feb. 5, just after celebrating record revenue for 2013, the company received a spot of bad news, TheStreet's Keris Alison Lahiff reported. The satellite radio broadcaster had been downgraded by Wunderlich from buy to hold. The ratings change was based on a valuation call with a $3.80 price target. It's homework time!

Nokia closed down Wednesday, at $7.15, off 24 cents, or 3.25%. The stock was about half that price less than a year ago. Last Friday, the stock popped on news that the Finnish smartphone maker had settled a patent dispute with HTC. The two smartphone makers also entered into a patent and technology collaboration agreement, TheStreet's Shawn Ingram reported.

TheStreet's ratings team says Nokia is a buy.

As for Sprint, it is down 26.51% year to date. The stock closed 17 cents higher on Wednesday, up 2.15%, at $8.07. That's because Sprint was upgraded to buy from hold by Deutsche Bank. The bank set a price target of $9.25 for the wireless carrier. That news would put Sprint on my radar.

[Read: Here's How to Double Your Money]

Saintvilus, in addition to writing for TheStreet, runs his own Web site, Wall St. Playbook.com. He urges investors -- whether green or seasoned -- to do their homework and plan their entry and exit strategies based on the aforementioned research, not hype or "hot tips." 

S ChartS data by YCharts


-- By Cherella Cox in New York

 

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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