Investing vs. Speculation: Why Cash Flow Still Wins Over Penny Stock Trading

Financial theory and investment valuation methods rely on the premise that markets are at least somewhat efficient. However, that assumption does not always hold. At times, investors (using the term loosely) disregard value entirely and focus solely on momentum, even when prices become detached from reality.

 

When Penny Stocks Detach From Value

Our first example is FGI Industries, a global supplier of kitchen and bath products that generated just $31 million in sales last quarter, so it is unlikely to be widely known. Until August 13th, the company’s total market value was less than $10 million, but its stock price more than doubled that day.

The remarkable part was not the meager 2.9% revenue increase or the $1.4 million in operating cash flow (not profits) but the trading volume of approximately 101 million shares. That represents roughly $1.5 billion worth of shares traded, even though the company has only 1.9 million shares outstanding. In effect, the entire share count turned over more than 53 times, implying an average holding period of about 7 minutes.

This is not investing—it is speculation aimed at making money fast. It also turns speculation into a game. Unfortunately, this kind of trading behavior is becoming increasingly common.

Our next example is INVO Fertility. Before its surge, the company had a market value of just $2.7 million. But on August 17th, its stock jumped from $1 to as high as $2.80. With only 2.3 million shares outstanding, the 113 million shares traded that day meant the entire share count turned over 49 times. In total, roughly $150 million worth of stock changed hands, an astonishing figure for a company that generated only $7 million in revenue over the past 12 months.

Sadot Group offers an even more extreme example. In its most recent quarter, the company reported $0 in revenue, yet on August 24th, roughly $750 million worth of its stock changed hands. The share price rose from $13 to as high as $30, making unlucky 13 a lucky number that Monday. The company announced a strategic pivot into AI, which the market apparently treated as justification for the extraordinary trading activity. Or maybe, they really don’t care what the company does.

Not to be outdone on August 24th, Expion360, now an oil company with a market capitalization of just $3.5 million, saw its stock soar over 100%. Based on the 85 million shares traded and a $9 share price, roughly $765 million worth of stock changed hands on Monday. Oil may be known as “black gold,” but this went far beyond anything tied to fundamental value or gold.

As of August 25th, CID HoldCo. and Xiao-I Corp. began the day with market values of less than $2 million and $1 million, respectively. By the end of trading, $500 million worth of CID shares had traded, and roughly $375 million worth of Xiao-I had traded. Neither company is profitable, but in this kind of market, profitability seems beside the point.

Cash Flow Still Wins Over Speculation

You may be wondering: why bring up these examples? They seem to reflect our society’s need for immediate gratification. Some “investors” want little more than a platform to trade where the price has a dramatic move. They do not expect to be around long enough to even find out what the company does.

If you want to be entertained or just be challenged, that’s ok. Going to Vegas is fine if you realize you are paying for entertainment. Anyone who believes that becoming a professional gambler is easy will likely be disappointed.

There is no “easy button,” as the old Staples commercial put it. Ultimately, everything comes back to cash flow and the ability to grow it.

Whether someone pays a million for a work of art, millions for acreage near Jackson Hole and the Tetons, or buys gold that generates no income, cash is still required to acquire those assets. Office rents, mortgage payments, and apartment rents all ultimately rest on the same foundation: they are supported by Corporate America’s earnings and the cash flow those earnings produce. There is no shortcut.

If a company grows its earnings and cash flow by 7% per year, it doubles in 10 years. That is far longer than one trading day. However, after 20 years, $1 has grown to $4; after 40 years, $1 has grown to $16.

That is just the market, not magic. The examples above are just distractions and a means to transfer your money to someone else.

Observations on the Market No. 422