Maven: Stocks Aren't Pretty in Pink

Stay away from companies trading on the 'Pink Sheets', where risk and hustlers abound.
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Let's put on our hip-high boots so that we can wade into the world of Pink Sheet stocks, where the business media does some of its best and worst work.

If you are thinking of investing in any of these companies, don't. As in: ever. Could one in a 1000 succeed? Sure. Or ... maybe. But the failure and moral-laxity rates are so high in Pink Sheet stocks that even knowing you were in one would give The Business Press Maven wakeful nights. So just

don't

do it.

Admittedly, the temptation to buy a Pink Sheet stock is sometimes great, especially because Pink Sheet companies, often operating under the shell of a failed enterprise, have a way of worming their way into businesses that are very much in the news: ethanol, China, commodities like diamonds.

This, unfortunately, feeds right in to what piques journalistic interest the most: What is current and of precise public interest at that very moment in history? In fields other than finance, writing breathlessly about what is momentarily hot does little damage. But here, investors ultimately lose money because what is hot rarely remains so -- especially in the hands of Pink Sheet companies, where profits are harder to come by than press releases filled with promise. Even when business journalists are just talking up an industry -- not necessarily a specific company -- the Pink Sheet company rises by taking advantage of the reflected glory.

Take ethanol ...

please

.

The Business Press Maven, as you know, was profoundly troubled

earlier this year by the overwhelmingly positive coverage given the near-term prospect of ethanol and any company that was peddling it.

In the distant future, of course, ethanol might just make investors money, but it is only one of many alternative energy sources and a currently complicated one at that. As The Business Press Maven so eloquently put it at one point, ethanol is an additive that is more expensive than what it is supposed to replace, which is a little like using a Hamburger Helper that is more expensive than beef. There were plenty of other complications, like corn supply and transportation. Some have faith and hope that ethanol can be made from everything from trash to cow poop, but besides sugar cane -- not readily available in America -- there hasn't been much success.

With alternative energies and ethanol so much in the news, the cat soon dragged in highfliers like

Xethanol

(XNL)

, ethanol promoters who produced more press releases than profits and operated under the shell of a failed pottery business. While some in the business media liked it, The Business Press Maven began screaming at people to get out when the stock was trading at about $10. It has now fallen to $3, but the larger point is that one of the most important functions of the business media to make sure investors cut a wide swath around such companies, even when the industries they purport to operate in are the talk of the town.

To this worthy end, there were three articles this week that will share the coveted Business Press Maven "Nod of Approval" award.

Christopher Byron, Herb Greenberg and Floyd Norris, three of the few business journalists who consistently do good work on behalf of investors in this area, weighed in with helpful pieces about companies that can/did hideous things to investors.

Byron, writing in

The New York Post

, raised an eyebrow on a number of smaller companies, but brought up a larger issue. Since the

New York Stock Exchange

(NYX)

absorbed the Arca electronic market, a number of firms -- which don't have the credentials to be NYSE traded -- are boasting of their NYSE affiliation to investors.

At

MarketWatch.com

, Greenberg frames this phenomena of reverse-merger stocks eventually making their way from the Pink Sheets to some form of a well-respected exchange well: "Just because they qualify to be listed here doesn't mean they've received some kind of Good Housekeeping Seal of Approval."

Over at

The New York Times

, Norris was busy committing some justifiable homicide on an operation called

CMKM Diamonds

-- which, uh, eventually had something to do with race cars. One key to spotting these sorts of scams is to sense that a company loves issuing flowery press releases and loathes issuing actual facts or financial data. While the company was not filing with the SEC. it did issue a press release with this instantly classic claim about a newly appointed official: He "served as an adviser to many great men and companies throughout the history of America."

Instinct should tell investors to run at the sound of this sort of rhetorical hyperbole, especially with no SEC. filings in sight. But the larger point, again, is essential. Since the media, in general, is so focused on what is current and hot, it gives hustlers a chance to capitalize on the excitement engendered -- even though profits are a long way away, at best. And there are a few journalists on the lookout for the scammers.

Now it's time for The Business Press Maven to go. I need to spend the rest of the weekend serving as an advisor to many great men.

A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children.