Don't Let the 'Root of All Evil' Tank Your Portfolio

David Duncan figured it was better to obstruct justice than let Enron's paperwork sit in his filing cabinet...

Duncan was one of audit company Arthur Andersen's lead auditors on the Enron account in the late 1990s. Enron had won a reputation as a fast-growing energy company, and everyone wanted a piece of the pie.

Auditing or consulting for Enron was prestigious... and massively profitable. The company reportedly paid Arthur Andersen $1 million per week just for audit fees.

Duncan and other auditors had known Enron was playing accounting games since at least 1999. Even so, the auditors kept signing off on Enron's financial statements. Duncan even praised and defended some of the company's choices.

That came back around to bite him...

In 2001, Enron quickly transformed from a profit center to a massive headache. The company was gearing up to announce a huge $618 million loss on its third-quarter financial statement.

Enron knew it couldn't keep propping up revenue with its games... And Duncan knew the end was near. Investors would start asking questions, and Enron would finally be discovered for fraud.

Duncan and his team shredded boxes full of Enron documents. They figured the legal liability of keeping those documents would be more expensive than disposing of them. As it turned out, Duncan was charged with obstruction of justice. One of the memos he sent in support of Enron's shell companies was used as evidence against him.

The Enron case destroyed the public's trust in Arthur Andersen. The U.S. Securities and Exchange Commission ("SEC") launched an investigation to make sure it was a one-time issue. It wasn't. Several other Arthur Andersen clients, including Waste Management (WM) and WorldCom, also revealed accounting fraud.

That was too much for the firm to handle. By 2002, it was practically defunct.

We've seen this plenty of times in the corporate world. Some of the worst examples of corporate fraud demonstrate how money and greed can lead to damaging blows for the economy.

It's not that wealth is inherently a problem. The real danger is when people become too attached to money... not the money itself. And as I'll explain today, that risk extends to your portfolio.

There's a famous saying that 'money is the root of all evil'...

This well-intentioned reminder gets misquoted and misinterpreted all too often. The actual quote, which comes from the Bible, is as follows...

For the love of money is the root of all evil.

Money is no more than a tool. It can be used for good, as wealthy Athenians proved, or for bad... like what happened with Arthur Andersen and Enron.

Greedy people become all too eager to get money at the expense of others. They accumulate a bigger piece of the pie while making the pie smaller. And the results are often devastating for everyone involved.

In contrast, the most successful entrepreneurs realize early on that the best path to wealth creation is by solving the needs of society.

Integrity is the most often cited trait that self-made millionaires claim is necessary to success. Greed is not.

Accumulating a large slice of pie while making the pie bigger... that's a great use of money. It becomes not a coveted object but an important tool. It's how we keep track of companies that are adding value (creating wealth for shareholders and growing) and those that aren't.

We'd all like to think that greedy, unscrupulous management teams are few and far between...

Unfortunately, that just isn't the case.

Look no further than the land of microcap stocks. It's still the Wild West of underpoliced public entities.

Companies with market caps of less than $1 billion don't get the same coverage as their bigger peers. Fewer Wall Street analysts and journalists pay attention to them. So they get less outside scrutiny in general.

The shareholders of microcaps aren't usually corporate pension funds or government-employee retirement funds. The SEC and attorneys general have far less reason to watch over them. And that makes microcaps a breeding ground for greedy management teams looking to enrich themselves at the expense of others.

The auditors and the government simply don't catch them.

However, that doesn't mean you have to fall victim to their cash grabs. There are a number of telltale signs that can help you avoid investing in greedy companies...

When we recommend microcaps, we run companies through a rigorous checklist that we call "fundamental forensics."

It looks for red flags like a weak auditor... a management team of "bad actors" with prior fraud involvement... a disreputable or falsified headquarters location... and any "related-party transactions," meaning the company is using corporate funds to line management's pockets on the side.

Every quarter in our Microcap Confidential advisory, we publish a "Do Not Buy List" of companies that have failed this test. It's how we identified a company called NantKwest – now ImmunityBio (IBRX) – in July 2020...

When we ran NantKwest through our fundamental forensics analysis, it turned up a lot of negative signs. For instance, back in 2016, the company leased office space from a property owned by Chairman and then-CEO Patrick Soon-Shiong.

That means the company was paying the CEO rent, in addition to a salary... And in 2019, he raised rent almost fivefold.

That was only the tip of the iceberg. And when we put these red flags together, they led us to believe management was mostly focused on lining its own pockets.

Since we warned subscribers to steer clear, ImmunityBio has repeatedly raised more capital from unsuspecting shareholders. And all the while, the stock has been in freefall. It's down 78% since we first flagged it.

ImmunityBio has plenty of company...

Our Do Not Buy List currently houses 46 potential portfolio "torpedoes." On average, shares of these companies fall more than 50% within just nine months of our flagging them.

Now, I want to be clear – I'm not saying you should avoid all microcaps. Just like how money isn't inherently bad, tiny companies aren't automatically dangerous or untrustworthy.

Each month in Microcap Confidential, my team and I identify a misunderstood opportunity that has the potential to soar in the coming months and years. Each recommendation has received a clean bill of health from our fundamental forensics test.

That's how we were able to find – and trust – companies like online real estate brokerage eXp World (EXPI)... also in July 2020.

While ImmunityBio has been on a one-way trip down since then, the opposite played out with eXp World. Subscribers who followed our advice sold a portion of their shares for an 860% gain seven months later. And we closed out our entire position last August for a total return of 293%.

2023 is full of the good and the bad...

And particularly in today's volatile times, you can't afford to fall victim to the ugly side of corporate management.

In less than 60 days, a critical catalyst will move more than half of the U.S. stock market... sending some microcaps soaring, while others fall more than 90%.

That's why on Wednesday, May 10, at 8 p.m. Eastern time, I'm hosting a special event to explain exactly what's going on – and how you can stay on the right side of this make-or-break day for $10 trillion worth of stocks.

I'll even share the name and ticker symbols of a top microcap to put your money in today... and one to avoid at all costs.

This event is free to attend. All I ask is that you RSVP here to let me know you're coming.

In the meantime, keep your eyes peeled for the warning signs of corporate greed... when investing in any company, and microcaps in particular. You can do your own version of our fundamental forensics analysis.

Look for warning signs like related-party transactions that line insiders' pockets, frequent capital raises, and even illegitimate headquarters locations.

All it takes is a little extra scrutiny to see which companies are committed to their goals... and which are in it to line their own pockets. And that insight can mean the difference between huge losses and astronomical gains.

Wishing you love, joy, and peace,

Joel
May 5, 2023