Tiny Oil Stock Making Mysterious 200% Jumps

A stock promotion just landed on my desk...

According to the promotion, the U.S. Geological Survey has just announced an enormous oil discovery. This oil discovery straddles the U.S. and Canadian border above North Dakota in an area called the Williston Basin. The USGS says the discovery contains 503 billion barrels of oil, worth $37.7 trillion at current prices.

"It's a literal ocean of oil," says the copy.

JayHawk Energy is a tiny oil company that owns five oil wells in the center of this discovery. According to the promo, JayHawk bought these wells a year ago, before anyone knew there was an "ocean" of oil there. Then the USGS released their report. JayHawk Energy suddenly finds itself sitting on a fortune...

"Every share of JYHW you buy today could skyrocket as much as 1,200% in the next 24 months," the promo says. "Buy JYHW – don't wait any longer."

Do I think you should put your money in JayHawk? Absolutely not!

Many times, in situations like this, stock promoters have taken a large position in whatever stock they are touting. Now, they want to sell their stake. So they're mailing this aggressive promotion to thousands of investors, hoping to push JayHawk's stock price up.

Here's the chart of JayHawk Energy. You can see they probably started mailing this promo in November 2009. Notice the spikes in January and June 2009. The promoters probably generated those spikes, too.

JayHawk is up 1,200% since January 2009. The promotion has worked. So now the promoters will likely sell their stock and find a new target. JayHawk's stock is probably about to collapse.

You might be surprised to hear this, but I don't have a problem with stock promotions like this. Not only are they 100% legal, but if you read the tiny print on the back page, the promoters tell you how much they paid to distribute the ad ($400,000) and how many shares of JayHawk they own (500,000).

"We're generating investor awareness," they say.

The investment markets are fraught with traps like this. They disguise the trap as investment advice, but they really just want you to buy whatever they're selling. Most traps are much harder to spot than this one. Take Wall Street investment banks, for instance. They use bullish research reports to cement lucrative investment banking relationships. Brokers use "buy" recommendations when they need to distribute stock. You should even ignore most advice from fund managers. They only mention stocks they have big profits in. They need your buying interest to liquidate their positions at good prices.

To be a successful investor, you must be able to distinguish biased research from independent research. The easiest way to do this is to ask "does the advisor stand to gain if I follow his advice?"

If the promoter is a Wall Street investment bank, for example, the answer is "yes," meaning you shouldn't pay any attention to the proponent's opinion. Their data might be useful, but their conclusions are worthless.

If the answer is "no," then you know the advisor has his reputation on the line. You can take this source seriously. This advisor has a major incentive to be right.

What about the advice we offer in DailyWealth? We don't have any financial interest in the stocks we cover. But we do have our reputations on the line. If we're boring, inaccurate, or wrong, then you'll stop reading and we'll lose our jobs. So giving valuable advice is the only thing that matters to us.

In sum, always stay alert for stock market traps like this JayHawk Energy situation. They're part of the business. Learn to recognize them and avoid them. If you need advice, only accept independent research where the advisor has an incentive to provide you with quality information.