In our last Penny Sleuth we looked at four blue chip wealth destroyers. We also considered the sheer wealth building capabilities of small cap shares.
Well I’ve just finished putting together the new issue of Red Hot Penny Shares. And it’s going to be difficult to find better potential money makers than the three companies I’ve discovered this month…
I our last issue I told you my initial calculations put the potential returns on these at between two to six times your money. Well scrap that. I’ve now worked out that if everything falls into place for one of these companies, there’s a chance of an 80-fold increase!
Even if you’re not already on my list to receive Red Hot Penny Shares, stay tuned. I’ll show you exactly how you can access my new issue. I’d like every Penny Sleuth reader to have the chance to get in on these three incredible shares.
The law of unintended consequences
In today’s Penny Sleuth I’d like to talk about The Law of Unintended Consequences. It’s very topical – and as you’ll see, it has very important implications for penny share investors.
In 1990 the Australian state of Victoria made it illegal for cyclists to ride without wearing a helmet. The intention was to reduce the number of serious head injuries. But there was another consequence that the regulators had not foreseen. Teenagers, who should be encouraged to cycle, stopped cycling. The reason? Cycle helmets were unfashionable.
Drill results excitement sends Falklands shares higher
Shares in Falkand Islands exploration shares have had a good run this week. Falkland Oil & Gas (ticker: FOGL) is up 22% this week, ahead of drilling results from its Toroa well, expected next week.
Buoyed by the enthusiasm are Rockhopper Exploration (ticker: RKH) up 7% and Borders & Southern (ticker: BOR) up 8% and Desire Petroleum (ticker: DES) up 3%.
What will really get these four racing is if FOGL announces it has found oil of good quality next week. If it doesn’t, expect Falklands shares across the board to give up some of their recent gains.
In 1692 the English philosopher John Locke argued against reducing the maximum rate of interest from 6% to 4%. The proposal was intended to benefit borrowers. But Locke argued that it would lead to a black market in lending to the detriment of borrowers. And, he predicted, the chief result would be redistribution away from ‘widows, orphans and all those who have their estates in money.‘
Getting back to the present, I think the recent emergency budget will have an unexpected consequence. Consider this: housing benefits have been cut and commentators have been quick to warn of claimants being thrown out of their homes. But how will landlords react? Will they simply allow these homes to stand empty? Or will they reduce the rental until they find a tenant? It’s obvious.
By reducing housing benefits the Government will hit landlords. This will bring about a reduction in rents. That will benefit all those who choose to rent their homes.
What’s this got to do with investment and, more importantly, penny shares? Keep reading.
How a clinical ‘failure’ led to one of the world’s biggest blockbuster drugs
The fact is, over the years the business world, too, has seen numerous examples of the law of unintended consequences. A famous example took place in 1992 when thirty men took part in a trial of a new drug called Sildenafil.
It was thought that this could be used to treat angina, the chest pain caused by heart disease. But in clinical trials, it failed to deliver the desired effect. Instead, strange things started to happen elsewhere – and ultimately led to the birth of the blockbuster drug, Viagra.
And here’s an example relevant to today: in 1989, the oil tanker, Exxon Valdez, hit the Bligh Island Reef off the coast of Alaska. It caused one of the most notorious oil spills in history – the largest in US waters until the recent Deepwater Horizon disaster.
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The reaction of regulators was to enact laws placing unlimited liability on tanker operators. But rather than take the risks implied by this draconian measure, the Exxon Valdez’s owner, Royal Dutch/Shell, decided to contract the job of transporting oil to independent tanker operators.
Rather than congratulating themselves for fixing the problem, regulators began to fret about fly-by-night tanker operators with leaky ships and dodgy insurance. The probability of spills increased and the likelihood of collecting damages decreased as a consequence of the new laws.
And here’s the point in all this: regulators and politicians need to think through the consequences of their actions very carefully. In his attacks on BP, President Obama has been playing to the gallery of US popular opinion. That may boost his popularity ratings. But he risks doing permanent damage to US energy supplies.
Why President Obama’s overreaction is creating new oil frontiers
A less hysterical response would recognize that oil supplies from on-shore and shallow water locations are being exhausted. And that deep water drilling offers one of the last remaining sources of oil.
But where, today, is the oil man who would sanction the drilling of a deep water well if a leak could bankrupt his business and put him behind bars? Obama is doing everything possible to discourage an industry upon which the United States depends. But this will have consequences elsewhere.
I recently identified one company that could be a major beneficiary of the BP spill. And last week I heard the views of a very experienced oil man. ‘Deep sea drilling won’t stop’, he told me. ‘It will just move elsewhere.’
I agree with him. In the Gulf of Mexico the drills may stop rotating and the taps may be turned off. But the world’s demand for oil has not changed. If they cannot produce it from the waters close to the precious US coastline, then oil companies will have to look elsewhere.
And I’ve found one ‘elsewhere’ that is just seeing the start of an oil exploration boom. It could hold billions of barrels of oil. The oil majors are gathering. But some bold and far-sighted small companies have got in first.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Past performance is not a reliable indicator of future performance. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.