Anybody with a working memory of the 1980s remembers the phenomenon of the horror movie villain who just would not die. It didn't matter how absurd the situations became, or that the sequels were just shameless grabs for money, the villains lived on as long as there were people willing to buy tickets or rent VHS tapes, which brings us to today's topic - bad publicly traded companies that just cannot die.

SEE: Is A Reputation A Bad Investment?

Greed - the Prime Mover
The responsibility (or blame) for the ongoing existence of many a "corpse-corp" can be laid squarely at the door of the corporate leadership. Many companies' plans simply fail to bear fruit; the responsible thing to do would be to wrap up operations and return whatever capital remains to investors. Instead, many companies live on because CEOs love their six-figure salaries and benefits.

Some executives will go to great lengths to preserve their salaries by convincing investors that greatness lies just around the corner, the company is unfairly maligned by evil short-sellers, and if shareholders just give the company a little more capital, then it will all work out great. And why not? It's not as though running one company into the ground is a sure ticket to another CEO job.

One such trick is the "noisy insider buy." Investors have long looked to insider buying as a sign of strength; less scrupulous executives will manipulate this by making a series of buys that look flashy, but either represent little actual money or are actually underwritten with loans or guarantees from the company.

It's not only the greed of executives that keeps bad companies in business. For every lousy company out there, there is an unscrupulous investment bank that would love to underwrite a capital-raising event for them. At a minimum, investors should be wary of companies underwritten by obscure banks - reputable firms won't tarnish their names by hustling money for penny stocks.

SEE: When Fear And Greed Take Over

Investor Greed Has Its Role Too
While greed among executives and bankers is bad enough, it's moot without complementary greed on the part of investors. There's a very cynical saying in the business - every lie requires a liar willing to tell it and a listener willing to believe it.

Investors love to dream of the huge score - the hundred-bagger that will buy them the Ferrari and the beach house. Unfortunately, these investors often buy into the story so hard that they lose all perspective. In their minds, every piece of bad news is just a temporary setback and anyone criticizing the company is an enemy to be shouted down. Unfortunately for them, the markets may be near-sighted, but they're not blind and few penny stocks develop into real companies.

A sure sign of a lousy company that knows it's lousy is a flurry of continual press releases, especially those touting Nobel prizes, patents and "revolutionary technology." These managers know what they're doing; penny stock investors thrive on what they perceive as encouraging information and just eat up these empty promises.

Many of these lousy companies actually pay for positive coverage. I myself have been approached numerous times by PR firms to write favorable reviews about worthless penny stock companies, and at $1,000 or more a pop, I can understand why dishonest writers would do it. With that in mind, be wary of any company with a ".pk" or ".ob" in its ticker that seems to attract a lot of blogger or writer interest. Simply put, reputable firms and writers don't spend much time on penny stocks.

How Should Investors Protect Themselves
Knowing the allure of the tenbagger, some investors will continue to dumpster-dive in the hopes of finding that diamond in the rough. Since it's difficult to dissuade them from trying, here are a few pieces of advice on how to avoid corpse-corps.

Firstly, be very skeptical of companies with no record of success and no sell-side support from a bank you've heard of before. That's especially true for companies that have been around for years with no discernible success. Look out for frequent trips to the public markets for money, often led by banks you've never heard of and/or wouldn't open an account with. Also, be wary of frequent PR releases - particularly those trumpeting the technology and/or its potential and not actual progress in R&D or marketing. Last and not least, be on the lookout for what top investors do - if leading small-cap or micro-cap funds have taken a position, that's a meaningful endorsement, though by no means a guarantee.

SEE: 10 Timeless Rules For Investors

The Bottom Line
Finding winning investments is hard enough; investors don't need to make it harder on themselves by fishing in waters where there's nothing worth catching. While the pull of greed and the relatively low legal risk of perpetuating lousy companies means that these awful publicly traded stocks will always be with us, investors should at least protect themselves and learn to be more discerning about their long-shot investment candidates.

Related Articles
  1. Mutual Funds & ETFs

    Top 4 Royce Funds for Retirement Diversification in 2016

    Discover four of The Royce Funds mutual funds suitable for diversifying retirement portfolios that focus on investing in small-cap companies.
  2. Stock Analysis

    Best Stocks to Buy for Around $1 (NXTD, MBII)

    Watch for strong technical indicators and other positive information when considering the purchase of any stock trading in the $1 range.
  3. Stock Analysis

    The Top 10 Small-Cap Stocks for 2016 (ATI, ARCB)

    Discover the top 10 small-cap stocks expected to grow in 2016, complete with summaries and growth outlooks for each company and its expected price target.
  4. Stock Analysis

    The Top 5 Gold Penny Stocks for 2016

    Discover five penny stock gold miners that are well-positioned to profit in 2016, providing opportunities for investors to make significant gains.
  5. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  6. Stock Analysis

    The Top 5 Small Cap Entertainment Stocks for 2016 (CKEC, RDI)

    Learn about these five small-cap entertainment stocks that deserve a spot in your portfolio for 2016. Take advantage of trends across the industry.
  7. Investing Basics

    How To Invest In Penny Stocks

    Penny stocks are highly speculative and very risky for many reasons, including their lack of liquidity and small market capitalization.
  8. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
  9. Stock Analysis

    The Top 5 Entertainment Penny Stocks for 2016 (SIRI, ZNGA)

    Learn more about what types of businesses comprise the entertainment industry, and discover five entertainment penny stocks for investors to consider in 2016.
  10. Stock Analysis

    The Top 5 Semiconductor Penny Stocks for 2016 (ACLS, CAMT)

    Learn more about the semiconductor industry, and discover five penny stocks that investors seeking exposure to this industry should consider in 2016.
  1. Do penny stocks trade after hours?

    Penny stocks are common shares of public companies that trade at a low price per share. These companies are normally small, ... Read Full Answer >>
  2. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  3. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. Why would you undertake a reverse split?

    Most reverse stock splits are undertaken by small, micro penny stocks that need to maintain the minimum price requirements ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center