Stupid Investment of the Week

Commentary: Don't gush over oil-spill stock plays

BOSTON (MarketWatch) -- BP PLC said Thursday it has slowed the flow of oil gushing from a ruptured well in the Gulf of Mexico, but not even a warning from regulators has quelled the gusher of money flowing into stocks that purportedly are going to clean up, financially speaking, from the crisis.

These are not investors making bets on oil prices or betting on (or against) the big-name energy companies, or the investors who have fallen in love with companies like environmental services biggie Clean Harbors Inc. /quotes/comstock/13*!clh/quotes/nls/clh (CLH 63.39, +2.00, +3.26%) or water-treatment operators like Nalco Holding Co. /quotes/comstock/13*!nlc/quotes/nls/nlc (NLC 22.66, -0.52, -2.24%) , both of which have gotten plenty of ink and play since the oil spill started in late April.

The real problem is investors who are diving into micro-cap stocks as murky as the oil-infected water itself, companies like MOP Environmental Solutions /quotes/comstock/11i!mopn (MOPN 0.10, -0.02, -14.78%) , ACT Clean Technologies /quotes/comstock/11i!aclh (ACLH 0.04, 0.00, 0.00%) , Green Bridge Industries /quotes/comstock/11i!grbg (GRBG 0.00, 0.00, 0.00%) and others where today's news is allowing stock promoters to profit, but is fleecing the little guy who has bought the Stupid Investment of the Week.

Oil benchmarks battle for supremacy

The battle rages on between Nymex's WTI crude futures and its rival ICE Brent. Critics say WTI is vulnerable to supply issues at delivery point Cushing, Oklahoma, while Nymex says fundamentals are transparent, and traders will vote with their feet.

Stupid Investment of the Week highlights the concerns and conditions that make securities less than ideal for average investors and is written in the hope that showcasing the danger in one scenario will make it easier for readers to spot and avoid trouble. While not a purchase recommendation, the column is not intended as an automatic sell signal.

In the case of oil-spill stocks, there is no denying the long-term promise of some of the technologies, but there are a lot of questions about whether they can get products to market, generate real sales and ultimately become a big winner.

Meanwhile, the discussions in chat rooms and message boards and in the emails and faxes some promoters are sending out include outrageous claims, so bad that the U.S. Securities & Exchange Commission and FINRA issued an alert to investors warning about oil-spill clean-up scams. Read the warning on FINRA's website.

Just this week, regulators suspended trading in ACT Clean Technologies because of claims being made about the stock, which included purported interest from BP to use a product with ties to ACT to cleanup the Gulf of Mexico, as well as purported test results finding that the products would be effective in cleaning up the spill.

No such action was taken against MOP Environmental Solutions, which made similar claims about an endorsement from BP /quotes/comstock/13*!bp/quotes/nls/bp (BP 42.95, -2.43, -5.35%) and the U.S. Coast Guard. A report on the stock at the Microstockprofit.com site notes that "MOP is promoting itself diligently by saying that its patented product is the ultimate solution for protecting ecosystems along the coastline from hazardous oil spills."

Lots of companies promote all kinds of claims, and stock promoters -- with or without the knowledge of corporate executives -- can take public statements and twist them in a myriad of ways.

But just because it sounds good doesn't make it a worthy investment.

Many of the stocks getting mentions as potential oil-spill plays really have nothing to gain from the mess in the Gulf. Stocks like Alternate Energy Holdings /quotes/comstock/11k!aehi (AEHI 0.58, -0.02, -2.85%) or Renewal Fuels /quotes/comstock/11i!rnwf (RNWF 0.00, 0.00, -29.73%) -- where there's no real direct connection or promise to be made -- have gotten some play from promoters, under the basic idea that the oil spill will generate a surge of interest in every type of alternative.

Just about any microcap stock mentioned as an oil-spill play has horrible numbers --provided you can actually get a look at them; they are in the back of the class, with a financial health grade of "F" from Morningstar. They're all traded on the OTC Bulletin Board or on the Pink Sheets, where the listing and reporting requirements are significantly less than on the larger exchanges.

And in some cases, the stock price is less than a penny. Stock promoters don't need a lot of victims, they just need a few people who say "I'd like to try this just once, and it's not much money to risk," so they invest in a stock without thinking that their odds of winning with it are only slightly better than in picking the daily lottery number.

There are good companies that trade on the pinks -- this is far from a blanket indictment of small stocks or those exchanges -- but some of the issues there don't trade very often, and make big jumps when they do move. In short, think of it like your money could be here today and gone tomorrow, because the guys pushing these stock ideas are waiting for your money to move the price so that they can capture the quick hit.

It's hardly the first time that regulators have taken a broad-brush approach to a group of stocks hyped by the headlines. There were hurricane stocks in 2005. In fact, this column looked at both hurricane stocks at that time and "swine-flu plays" last year; in the latter case, many stocks got a small temporary bump from the headlines, but actually had some real potential there and proved that perhaps they did not deserve being described as poor picks.

That is part of the reason why investors are willing to take a chance on the oil plays. Even when the Gulf spill is cleaned up, energy is a story that never goes away.

Alas, the same can be said for self-serving traders pimping stocks based on whatever crisis or catastrophe is in the news.

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.