Prior to looking at examples of penny stocks that had potential but failed, it’s important to first note that penny stocks are probably not where you want to invest. The penny stock market exists because it preys on greed. Many investors logically think that a penny stock has greater odds of doubling than a stock that trades at a higher price. This is true, but these are usually pump-and-dump schemes. You will almost never see a penny stock enjoy a sustainable ride higher. It does happen, but it’s extremely rare. Therefore, there are only two ways to succeed by investing in penny stocks.

The first way is to find those needles in the haystack, which isn’t as complicated as you might think. It’s just time-consuming. And you need a lot of discipline. For instance, don’t be swayed by management promises of extraordinary potential. This is often a red flag. Also strongly consider avoiding very low stock prices (below $1), low volume (below 100,000 shares), and miniscule market caps (especially below $1 million). This will help you avoid investing in companies tied to manipulative tactics. Another simple tip is to go to the company’s website. The quality of that site and details offered, or not offered, will tell you a lot. Also, avoid companies with no revenue (this will quickly eliminate most true penny stocks), avoid companies with more liabilities than assets, and steer clear of mining exploration companies that are constantly exploring and never sell anything. (For more, see: What is a Penny Stock?)

The other way to succeed is to use manipulation to your advantage. For instance, if you see marketing material to help pump up the stock and jump in earlier than most, then you can enjoy the artificial ride higher, then get out before the dump. However, this requires experience and impeccable timing.

Now with that short tutorial out of the way, let’s see what penny stocks had potential but failed. However, to be more specific, not of all of these companies have failed yet in a literal sense. It’s only a matter of time. The Securities and Exchange Commission (SEC) now considers any stock trading below $5 as a penny stock. In this article, we're using the old version, which are stocks trading below $1. (For more, see: The Lowdown on Penny Stocks.)

All numbers below as of April 23, 2015.

Capstone Therapeutics

In February 1993, Capstone Therapeutics Corp. (CAPS) opened at just $2 per share. By May 1996, it traded at an all time high of $22.13. This is an example of rare penny stock potential. That said, like most penny stocks, it was only a matter of time before the trend turned in the opposite direction. In this case there was a real business, which focused on (and still focuses on) a pipeline of peptides and other molecules for helping patients with under-served medical conditions. Don’t get excited, though. CAPS is currently trading at $0.15, and there is no reported revenue, just losses. The balance sheet of $2.16 million in total cash versus no long-term debt might look appealing to some, but these folks failed to notice that operating cash flow, trailing twelve months is negative $4.09 million.

Green Innovations

For a moment it looked as Green Innovations Ltd. (GNIN), a seller, importer and distributor of bamboo pulp-based hygiene and household products, had a shot at defying penny stock odds. But if would have been difficult to pull off given gargantuan competition in the household product market, including Procter & Gamble Co. (PG), Clorox Co. (CLX), and Kimberly-Clark Corp. (KMB). Green Innovations has actually delivered annual revenue gains over the past three years, but losses are consistent, and $49.16 thousand in total cash versus. $4.65 million in long-term debt to go along with negative operating cash flow of $1.36 million doesn’t paint a pretty picture. If you’re thinking of a gamble here, shut down whatever technological device you’re currently using immediately and go for a long walk. (For more, see: How to Select a Penny Stock Broker.)

Its initial public offering price (IPO)  in December 2012 was $1, it hit an all time high in February 2013 of $2.75 and is currently trading in the $0.0049 range.

Goff Corporation

Goff Corporation (GOFF) is an exploration and mining company (gold ores) that has no reported revenue and operates in Colombia. In April 2013, it traded at $0.37, then spiked to $0.59 before crashing to $0.002. Very suspicious. This company never really had potential, but it’s an example of what kind of patterns to expect with penny stocks. (For more, see: How to Identify a Micro-Cap Scam.)

The Bottom Line

Have you ever met anyone who has made millions in penny stocks? Exactly. They all end up losing. This isn’t investing, it’s gambling. If you want to see sustainable returns throughout your investing career, then it’s highly recommended that you avoid penny stocks. If you’re too enamored by penny stocks to avoid them, only allocate a small percentage of available trading capital and stay away from companies that don’t offer detailed information, which is most of them. (For more, see: How to Pick Winning Penny Stocks.)

Dan Moskowitz does not have any positions in CAPS, PG, CLX, KMB or GOFF.