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Blog : Why RFID Penny Stocks Scare Me

April 11th, 2007

I lead the panel at the Arch Investment Conference in Manhattan each month, and it was at the most recent one in March where I noticed something that gave me a little bit of a fright.

Specifically, it was a company that has built homeland security and vehicle tracking solutions using a RFID backbone. What is RFID? Radio frequency devices which has all sorts of cool applications, like tracking freight, recovering stolen cars, monitoring prisoners, and many other things.

RFID is the latest fad / buzzword in the world of penny stocks, and mid-caps for that matter too. I questioned the company, put them on the spot, and challenged their business plan, in front of the invitation-only crowd of venture capitalists, money managers, and Wall Street hitters. Yet, truth be told, I actually liked the company a lot - a good story, good technology, and plenty of money-making applications for what they had developed.

Yet there was that voice, you know the one... at the deepest part of your subconscious, and you don't actually notice it's there until the last minute... which happens to be the precise moment when you realize that it had been there the whole time.

I'll tell you what that little voice, which had finally emerged, reminded me of:

- I had questioned another RFID company at the previous conference

- And there had been yet another at the one before that

- In fact, RFID penny stocks have been coming out of the woodwork lately. I keep seeing them each day when I do my analysis and scanning of the markets

- the pace of new RFID companies stepping into the investor visibility arena has been accelerating

The point really hit home when I was tearing through a list of about 100 Canadian penny stocks, for use on the latest Quick Fix report. I was trying to shortlist down to about 1 or 2 penny stocks from that batch. On just that list alone, I found 8 companies involved in RFID technology and it's uses. All of them had a pretty good story, and at first (and even second) glance, seemed like they could make a run of it. Yet, I started getting the distint impression that these RFID stocks are going to sink, and take down a lot of investors with them.

A room with enough oxygen for 3 can keep one man alive. It can keep 2 or 3 men alive. It may even be able to keep 4 alive if they conserve their breath. Yet if you load that room with 10 people, they all suffocate. Pretty soon RFID could look eerily similar to that.

Just like there used to be hundreds of car production companies in the USA, now there are only 3. Just like Nanotech was the new market darling, and now... not so much.

So many RFID penny stocks, springing up together as one. That leads me to question the barriers to entry for the industry, as well as to expect that the complexity of the technology itself is not enough to stave off an endless wave of new players.

At first, this looked like there were a few too many rats in the barn. Looking a little deeper, it is turning out to be an infestation.

And now for my final analogy (for some reason I'm on a big analogy kick today...):

Three or four RFID penny stocks will do exceptionally well. The rest will die on the vine. If you are not a RFID sommelier (that's an unnecessarily fancy word for wine expert), you might want to look for your grapes elsewhere.