A One Year Anniversary, Bad Psychics and Penny Stocks

Over the last week, Wall Street has been privy to a number of interesting historical and mystical anecdotes. Of particular note, March 9 marked the one year anniversary of stocks hitting a 12-year low amid the financial crisis stemming from a home mortgage meltdown.

Since then, the markets have experienced a remarkable comeback. The blue-chip Dow Index has rallied more than 60%. The benchmark S&P/TSX composite has surged almost 60%. And the S&P 500 has rallied nearly 70%.

But as any astute penny stock investor will tell you, you had to be in it to enjoy the ride. And it looks as though a lot of investors weren't in it. In fact, investors pulled $40 billion out of U.S. stock funds since the start of last year. It's estimated that more than $3 trillion of investors' cash is sitting on the sidelines.

But who, you may ask, could have predicted the exact moment the markets would turn? And are there still penny stocks out there with additional leg room?

Interestingly, a self proclaimed psychic, patriotically calling himself "America's Prophet," claims to have called, "ALL the highs and lows of the market giving EXACT DATES for rises and crashes over the last 14 years."

Pretty heady claims indeed. According to the star gazing stock market prognosticator, Sean David Morton, the Dalai Lama sent him to a monastery where he was trained by Nepalese monks in the art of time travel AND foretelling the future of the stock market.

What's not to trust? Plenty, according to the Securities and Exchange Commission (SEC). Trust the SEC to crush the dreams of Morton and his followers.

Not only is Morton a fraud, the SEC contends, he is also a really, really bad psychic. The SEC sued Mr. Morton for securities fraud recently, claiming he swindled more than $6-million from investors by promising them "piles of money," along with spiritual happiness.

Morton solicited investors through a newsletter that reached, wait for it, 20,000 subscribers!!! He and his galactic wife, Melissa, created three unregistered "trading systems" for their investors. One was called Magic Eight Ball Distribution. Enough said.

According to the SEC, Mr. Morton pledged to invest the money he collected with foreign currency traders, who would act according to his psychic revelations. He told his minions his strategy earned returns as high as 117% over five-month periods.

Under closer scrutiny however…it was discovered that Mr. Morton deposited only $3.2- million into the trading accounts. The rest was funneled to "various entities".

Not surprisingly, his Magic Eight Ball trading system wasn't as accurate as he professed. On a Nov. 21, 2001, radio broadcast, Mr. Morton predicted that the Dow Jones Industrial Average would rise between April and June of 2002, cresting at "12,000 or so" by December of that year.

According to the SEC, the index fell that year, ending at 8,341.

It's all a conspiracy though meant to discredit the Mortons' trading system. The Morton's argued that they were the target of "two (or more) dishonest and incompetent SEC employees, who apparently need to justify a trip to California in order to visit Disneyland and eat In And Out Burgers at the taxpayers' expense."

Morton clearly missed the monk's classes on humility and public relations.

Now, I'm no psychic but I find the best way to uncover excellent penny stocks is to do your own due diligence. No, it's not as easy as listening to the sage advice of a psychic. And while history is not always an indicator of future gains, a penny stock's history can certainly give you a better understanding of its potential returns. At least, I think it's a better predictor than insight from Nepalese time travelers.

If you're looking for fundamentally solid penny stocks for your portfolio, you may want to consider medical services provider Continucare Corp. (CNU - AMEX). Continuecare is a profitable company with strong fundamentals, a huge cash position, growing revenues, and excellent long-term growth potential.

In early February, CNU announced that second quarter revenue was up 15% year-over-year at $75.3 million. Net income was up 45% at $5.3 million, or $0.09 per share. For the six-months ended December 31, 2009, total revenue increased 16% to $151.2 million. Net income for the six-month period increased 72% to $10.6 million, or $0.17 per diluted share.

Warren Buffet isn't the only interesting stock story to come out of Omaha. An international supplier of motion picture theater equipment (including 3D), Ballantyne Strong, Inc. (BTN - AMEX) has over $23 million in cash, no long-term debt, growing revenues, and strong market penetration.

In November, BTN announced that third quarter revenue was up 34% at $16.6 million. The company also swung to profitability of $0.5 million, or $0.04 per diluted share. Year-to-date revenues climbed 32.7% to $53.3 million. BTN also swung to year-to-date profitability of $2.0 million, or $0.14 per diluted share.

Finding excellent penny stocks won't help you raise Atlantis, but it could help you increase your bank balance.