Penny Investing 101

Saturday, June 17, 2006

Penny Stock Investing 101

The real key to being successful investing in penny stocks is value. There are several kinds of value a stock can have. Since stocks trade in an open market they can have what I call “hype value” if enough people are convinced that a company’s product or concept has real world potential the stock price can run up astronomically without the company ever turning a profit. A few of these stocks eventually realize their potential and become real money makers. Unfortunately, many do not. Trading on hype value can be very dangerous. Another kind of hype is what I call “chart hype“ technical analysts, and chart watchers everywhere make millions of dollars of stock trades every day based solely on how it looks on the chart.

Another kind of value a stock can have is what I basically think of as “fundamental value”. Stocks with this kind of value have made real profits in the real world, have a proven track record, and have not discontinued the operations that make them money. Finding these values is easy by focusing on a combination of P/E ratios, news, and earnings reports. This is the kind of value I like to trade on.

If the stock has earnings, looks to continue to have similar or superior earnings, and is not in any legal trouble. Any P/E ratio below 3 has real upside potential, the lower the better. Big established companies usually trade at a P/E of between 10 and 20, and sometimes as high as 40 or more. Small established companies with low P/E’s offer great opportunities to the value investor. If you know the company is a money maker, and you know it should continue to be, and the current share price is low relative to earnings, you just have to buy it, and wait for the rest of the market to realize the opportunity you saw on value when the chart was looking “bad” to people who think the chart trend is important. Now, when the chart shows a slight upward trend, the people who didn’t see the value when you saw it start buying. You just sit back and watch it go up, if it’s a penny stock, you can make several hundred percent gains. I’ve bought penny stocks for $300 and sold them for $7000, although in most instances I‘d be tempted to sell a $300 play at around $600, and very likely to sell it, even still trending up, at about $1000 to $1200.

When you see the value of a stock before the rest of the market does you can make huge gains. It might take a year or more, but if the value is there the rest of the market will eventually see it. If you have a diversified portfolio of five or ten of these plays you will consistently make money. It’s really that easy, it’s not rocket science, just simple logic, a company that makes 99 cents per share every year is worth at least 99 cents, and on a break out up-trend it can be worth $5-10 easily in the market. So, if it’s trading for 50 cents and there is nothing wrong with the company, it’s a buy and hold. That’s it in a nutshell, very simple, very easy, and very profitable.


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