To pick some winning penny stocks, it is important to know how the market works. Without a solid understanding of the underlying principles of the market, it is virtually impossible to consistently pick stocks that will perform well. If you’re new to penny stocks you can read my beginners guide.
The most important thing to know is that the stock market is fueled by investor perceptions. Especially in the short term.
What Should You Look for in a Penny Stock?
Look for stocks that are in an industry that you believe is growing, with solid financial statements and a reasonable business plan.
The actual penny stocks that you would want to invest in would depend on your investment strategy.
Buy and Hold
If you are a buy and hold investor, you should look for stocks that are undervalued. That their market capitalization (their stock price multiplied by the number of shares that are out there) is less than their company is worth. After buying these stocks, a buy and hold investor will hold on to them until they believe that their market capitalization is equal to their actual value.
A day trader is an investor who typically buys and sells financial products (stocks, bonds, options, derivatives, etc.) within a trading day. Like a buy and hold investor, a day trader looks for companies who have a market capitalization that is less than their actual value. The difference is that a day trader won’t hold the investment for as long of a period and relies on short term upswings of the stock price for their profit.
For the purposes of this article, I’m going to ignore a day trading strategy. Because of the short-term focus of day traders, any advice that I can give you is going to be obsolete by the time that you read it.
Penny stocks that are listed on a major stock exchange are going to be a safer investment than ones that you buy Over The Counter. The reporting requirements that the exchanges force companies to abide by help you to make sure that their financial disclosures are accurate. Additionally, they are likely to be traded more regularly. If you want to get out of the investment, you will be able to do so more easily. The drawback is that the returns may not be quite as big as with the riskier Over The Counter investments.
GLU MOBILE (GLUU) – Glu Mobile is a mobile gaming app publisher. Their stock trades on the NASDAQ. They had an up and down 2016 and start to 2017. As of this writing, their stock is trading at $2.31. In the last year, their trading low was $1.79 and they have a 52-week high of $2.95. Their financial statements are a little on the ugly side now, but their outlook for the next year is improving. They are releasing some new titles over the next year that should help their bottom line, which should boost their stock price. Their next earnings report is due on May 3, 2017 and analysts are expecting it to beat expectations. There is risk with investing in this company because their revenues are so dependent on the success of their games and the mobile gaming world can be a fickle one.
CytRx (CYTR) – CytRX is a biopharmaceutical research and development company that focuses on oncology research. They are in the process of producing a new and improved drug (aldoxorubicin) to be used in chemotherapy in fighting soft tissue sarcoma (a type of cancer that occurs in muscle, fat, blood vessels, tendons, fibrous tissues and connective tissues). They are presenting the data from their Phase 3 Trial on the drug at a conference on June 2, 2017. Additionally, they have reached an agreement with the FDA on a path forward for getting the drug approved for use. It is expected that the test results will support their New Drug Application submission. Investors have reacted favourably to the news. The commercial launch of the drug is anticipated to happen in early 2018. Currently, their stock trading at $0.61. That’s at the low end of their 52-week performance band. Their 52-week low is $0.361 and their high is $3.66.
Carver Bancorp (CARV) – Carver Bancorp is the holding company for Carver Federal Savings Bank, a community bank based out of Harlem, NY. Their stock is currently trading for $4.71 with a 52-week high of $6.61 and a 52-week low of $2.87. The bank is profitable. Owners of the stock have had a good week on the market (a 47.59% return), but I don’t believe it to be overvalued. The stock price does fluctuate a fair bit. Keeping an eye on it and buying after a down swing may be the best play here.
Arotech (ARTX) – Arotech Corporation provides defense and security products and training to the military, law enforcement, municipal and homeland security markets. In the current climate, they work in an industry that is likely to see some growth. Their stock is currently trading at $3.10. Their 52-week high is $5.00 and low is $2.25. They analysts opinions that I’ve read on the stock have a median 12 month stock price prediction of $4.75.
Expectation of Financial Performance
If Company A is expected to report earnings per share of $2.00 and ends up reporting earnings per share of $1.95, their stock price will likely drop. If Company B is expected to report earnings of $1.00 per share and ends up reporting earnings per share of $1.05, their stock price will likely rise. Even though Company A has made more money in the reporting period, the market has already priced their expectations into their stock price. By not meeting the expectations, their stock price will likely drop.
Expectation of External Factors
The market is additionally fueled by external factors (changes that happen outside of the companies in the stock market that affect the companies). A perfect example of this is marijuana legalization. In January of 2015 a Marijuana Index was started. They took a list of 23 publicly traded marijuana stocks that had a market capitalization of $10 million, a daily trading volume of $20,000 and a share price of over $0.10. In 2015, it dropped by almost 60 percent. From January 1, 2016 to October 15, 2016 that same basket of stocks rose by more than 180 percent. A key factor in the growth was that four states legalized recreational use with a further three states legalizing medicinal use. The market for marijuana products got bigger, so the price of marijuana shares when higher.
The information that I’ve provided to you today is based on the best information that I have at the time of writing this article. Predicting stock prices is inherently difficult to do. While I believe that the above-mentioned stocks are likely to be good buys, I do not guarantee that they will be. Do your research to make sure that an investment is an appropriate one for you