Here’s how to know if your next penny stock play is legit…

For many investors, the idea that a stock could be representing itself incorrectly is unthinkable. After all, we’ve got the SEC, the exchanges – like NYSE and NASDAQ – and independent auditors taking a look at every filing that a company puts out to shareholders. But in the world of microcap stocks, many of those same protections just aren’t there.

While Securities and Exchange Commission (SEC) was created, in part, to protect investors from nefarious activities in the stock market, the countless securities scandals of the last couple of years have shown us that the agency simply doesn’t have the resources to make sure that the smallest companies are reporting accurately. And in fact, many of the smallest microcap stocks are completely exempt from reporting to the SEC.

Serious listing requirements (almost always) ensure that stocks trading on major exchanges are legitimate businesses, but for stocks that trade OTC or on the Pink Sheets, the requirements to get shares trading are slim to none.

And while most investors think of audited financials as a safeguard that keeps a company’s financials accurate, many companies also aren’t required to get their books audited because of their size.

Even if you’re thinking about investing in a Pink Sheets stock that’s exempt from registering with the SEC and getting an audit performed, you might still be looking at a perfectly good penny stock investment… but you have to do your homework.

Verify the Business

The first step to determining whether a penny stock is legitimate is to verify that the business exists and does what you think it does.

You can start off by entering the stock’s ticker on a major financial site – like Google Finance – and checking out the description of the company. Those descriptions come from SEC filings, so you can generally trust what they say since thanks to the Sarbanes-Oxley Act, it’s a felony for management to lie on company filings.

Also, log onto the SEC’s website and look for company filings to get the full look at a company’s operations. And don’t forget to look at its ticker… an “E” at the end means that the company is delinquent in providing its regulatory filings – a very big red flag.

For companies small enough to not file with the SEC, ask your broker for a copy of the company’s “Rule 15c2-11 file”. In it, you’ll find a slew of information that the company was required to provide to prove their exempt status.

Check the Auditor

When you’re reading a company’s financials on the SEC website, look for the audit opinion (generally near the end of a 10-K annual report filing). It’s a statement from the independent auditors that explains the steps an auditor took to verify a company’s financials as well as whether the financials are accurate in their opinion.

Checking who the auditor is makes a big difference too. Bernie Madoff’s “independent” auditor was neither – he trusted Madoff too, blindly signing off on the scamster’s financials and losing millions of his own in the process. Checking into the accountant’s CPA firm would have showed that it was a tiny storefront with only one CPA and without the manpower to audit a multi-billion dollar financial firm.

Getting audited by one of the “big four” accounting firms – PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young – is generally the domain of big blue chips that can afford to have prestigious accounting firms handle the audit, so don’t stress if the auditor’s name doesn’t look familiar. Take the time to research who the auditor is, though, and whether they’re qualified to handle a company audit. A quick Google search should solve that…

Give Them a Call

Hard-to-find contact information is another red flag that should be watched out for. Since most companies are constantly on the lookout for new business, their sales team should at least be easily accessible. If you have concerns about whether or not the company is legit, go ahead and call the phone number on their website. If you can’t find a number or address, check back on the SEC website – companies have to include their corporate contact information on the cover of all 10-K and 10-Q filings.

New technology has also made it much easier to verify a business’s contact information. Just type in a company’s address into Google Maps, and select “Street View”, and you can actually see the building where its offices are located. If the offices for a publicly traded stock are showing up as someone’s home or a mailbox rental store, be very wary of going forward.

Follow the Money

If you really want to know about a company, you have to follow the money – its customers…

For any company that markets its products to consumers, a quick web search should give you an idea of how well – or poorly – the company is treating the people who use its services. Reading customer experiences will also give you an idea of whether or not people are jibing with the company’s offerings.

Googling your way to customer experiences isn’t always an option, especially when a company caters to enterprise or government clients. In these cases, where more money is generally involved, lawsuits are more likely as a result of business disputes. Check an online legal database – like the U.S. PACER System – to see whether your potential microcap investment is being sued by customers.

Check for Promotions

It’s possible for a company to be legitimate while the news that “independent parties” are touting isn’t. These so called “stock promoters” are publishing faux research reports and stock recommendations in hopes that investors will catch on to the penny stocks they’re selling. They do this through websites and newsletters that seem legitimate on the surface, but are essentially nothing more than schemes to get people to buy these stocks.

While we’ve never accepted money to write about any stock here at the Sleuth, some in the industry do… And believe it or not, it’s completely legal as far as the SEC is concerned.

There are a few ways that you can tell whether a stock’s being pumped by a promoter. For starters, go to the horse’s mouth – check out StockPromoters.com – the site features a listing of which stocks are paying for which promoters, as well as what the promoters are getting in return.

Promoters aren’t ashamed about what they do – they want companies to know how good they are at their jobs…that’s why they’re so easy to spot.

More Homework, More Profits

To be sure, doing the research is tough and time consuming. But it’s also the only way to be completely sure that the next penny stock play you’re putting your hard earned money on the line for is legit. Small stocks have some of the greatest gain potential out there – and if you know what to look for, you can make sure that you don’t get burned in the process of pursuing profits.

Cheers,
Jonas Elmerraji

November 5, 2009

How to Tell if Your Next Penny Stock Play Is Legit was originally featured in the Penny Sleuth.

And it’s a list worth watching… if you kept up with our Penny Stock Watchlist last Monday, you could have made 12%, 24%, even 89% on a single play. This week, we’ve got five more stocks that are worth watching between now and Friday.

There’s no question that last week’s Watchlist was impacted by a stock market that pushed investors down four out of five trading days. But still, we managed to leverage that negative sentiment with our short recommendation in Synovus Financial (NYSE: SNV) for a potential 24% gain.

And while our Watchlist errs on the safe side of small-caps, using technical analysis to tell us where a stock is headed, we opened the comments up to readers last week, giving you the chance to offer up more speculative penny stock plays – and win a special edition DVD of I.O.U.S.A. in the process…

Well, the results have been tabulated, and last week’s best-performing penny pickers were Kevin H. who suggested shares of Signature Devices (PINK: SDVI) for an 89.19% gain and Jay V. who suggested shares of Artificial Life (OTC: ALIF) for a gain of 39.13%. Both of our winners will be getting a Penny Sleuth Prize Package in the mail for their trouble.

You’ll get another chance to win this week. More on that in a minute…

First, onto this week’s Penny Stock Watchlist:

Nabi Biopharmaceuticals (NASDAQ: NABI) – This $163 million biopharma stock has been facing intense pressure from shareholders of late. Right now the stock is sitting right below its key resistance levels, which could be a very big deal. If this stock pushes above its 50-day moving average, expect the ensuing breakout to send shares up double-digits. Otherwise, this stock should be left to the short sellers this week.

LiveDeal (NASDAQ: LIVE) – This internet Yellow Pages publisher has fallen on tough times as advertising rates have fallen through the floor, posting yet another consecutive loss in its latest quarter. That said, things could be looking up for shareholders this week as the stock bounces off of support and back up into gain-range.

Sunwin International Neutraceuticals (OTC: SUWN) – Sunwin is a Chinese company produces and sells a natural sweeteners and medicinal herbs. Right now shares of this small and volatile company look like they’re consolidating, which with the help of a bullish overall market could be one sweet stock for careful investors.

Newpark Resources (NYSE: NR) – As with LiveDeal, Newpark Resources just found support at its 200-day moving average, and could be signaling for a big bounce. Newpark, an oilfield service provider, has taken some hard hits this year as oil prices fell from record highs down to $30 per barrel. But as oil prices make a resurgence, this stock should benefit from additional drilling activity.

Imation Corp (NYSE: IMN) – This digital media company is exhibiting a bearish pattern right now despite solid earnings number in late October. An uptick in volume on this stock doesn’t bode well for investors who are long.

Share Your Penny Stock Picks

Once again, we’re going interactive this week… And giving readers the chance to win a free copy of I.O.U.S.A. in the process.

Just post your recommendation below in the comments section of this article between now and the market’s close on Friday, November 6. The two readers with the best performing picks each score a Special Edition DVD of the award-winning documentary.

Cheers,
Jonas Elmerraji

November 2, 2009

Monday Penny Stock Watchlist: And the Winner Is… was originally featured in the Penny Sleuth.

The last time we talked about our Small-Cap Recovery Index (SCRI), we looked at how the SCRI was performing compared to the S&P 500. Today, we’re taking a look at how the SCRI can tell us precisely which industries are leading the charge to recovery…

Knowing precisely which industries to watch is exactly what we said the SCRI was capable of delivering…

Now we’ve made that level of data a reality, and we’re finally getting a first look at how different sectors of the SCRI are performing.

There are two very interesting takeaways from the charts — first, industry standings were pretty much in line with our expectations, and second, it’s important to note that even the best industries of the SCRI are having a rough month.

It’s no surprise that media and education are among the best performers right now — media companies got slammed in the aftermath of the credit crunch, and education companies have seen increased activity as job seekers look to beef up their resumes with advanced degrees. What is more interesting, however, is that real estate investment trusts (REITs) are already starting to come back.

REIT prices also got hit hard last year, but increased real estate values this soon in the recovery process could be a very big deal for consumer confidence.

The worst performing small-cap sectors of the last month are also little surprise to investors who have been following the economy in the last year. With dried-up discretionary spending, transportation, industrial and building material companies have continued to fight to keep the lights on. Taking the biggest hit, though, was our miscellaneous sector, which includes several hospitality companies and a gym chain.

There’s been a lot of downward pressure on our Small-Cap Recovery Index over the course of the last month. That’s especially evident among our best performing sectors, in which engineering stocks finished the month in the red, but still managed to make our “best” list.

That’s yet another confirmation of what the SCRI Oscillator warned about last month — that stocks would be headed back down in the coming weeks. Going forward, it’s essential to be wary of the worst performing small-cap industries right now, as their underperformance isn’t likely to change until the market changes its mind. And right now, it’s doubtful that we’ll see much of a jolt in the next couple of weeks.

As always, we’ll keep you updated on what the SCRI is indicating to us.

Cheers,
Jonas Elmerraji

October 21, 2009

The Four Small-Cap Industries Best Positioned for Gains Right Now was originally featured in the Penny Sleuth.

Keep this volatility tip in mind and you’ll be well on your way to profiting from the price swings…

It can be nerve-racking to watch a stock pinball. And if you own shares of any penny stock, you have to be able to spot whether or not the stock is taking a turn for the worse. But wild price swings don’t always mean that there’s cause for concern in your small-cap portfolio.

OTC Is Inherently Volatile

Volatility is inherent in any small-cap stock, but that’s especially true of stocks that trade over-the-counter, or OTC.

And now, with volatility higher than ever on the big boards – like the NYSE and the NASDAQ – as well, the volatility we’re seeing in the penny stock arena is unprecedented. That’s why we need to consider the cause of the volatility, because the reason for a price swing can often tell us quite a bit about where prices are headed next.

First, you need to look at the bid and ask.

The bid – the price that investors are willing to pay for shares – and the ask – the price shareholders are willing to sell shares for – are key parts of how shares of a stock are priced. With blue chips, the difference between the bid and ask price (known as the spread) is tiny, but for penny stocks spreads can be enormous.

Just look at WordGate Communications (OTC: WGAT), which has a 4 cent spread as of Friday morning. With WGAT currently trading at $1.04 per share, that spread represents almost a 4% of the company’s share price – and many OTC stocks have much higher spreads.

That’s largely a product of volume, which is the number of shares that trade hands during trading. Because investors set the market prices of stocks by their buying and selling activity, all any stock needs to make a serious move (up or down) is trading volume. That’s why it’s exciting to find a stock that can make a big move without a lot of extra buying power behind it.

You may have heard a broker or trader talk about a stock that “moves on air.” Simply put, it doesn’t take a lot of extra buying to get shares to blast off. That’s why traders are always looking for “low floaters.” These are the stocks that don’t have a lot of shares that are unrestricted and available for trading on any given day. That’s often true of penny stocks – with relatively low trading volume on any given day, small share transactions can be a major component of share price.

That’s why OTC stocks are so powerful. Little bumps in volume can translate into huge moves in the share price. That was certainly the case with WGAT – shares have rallied 134% in the last month alone thanks to a volume-induced push. And other OTC plays, like IMAGING3 Inc. (OTC: IMGG) have fared even better, pushing 1,580% in the last thirty days.

That’s performance that you’ll only find with bulletin board stocks…

When investor interest returns and volume picks up — thanks to positive news, earnings or guidance — the spread should shrink and the stock should move up nicely.

Just look at the real-time streaming quote generator on your online brokerage site. Type in your favorite blue chip and you’ll see a flurry of activity. Thousands upon thousands of shares will trade in a matter of seconds right before your eyes.

Now type in WGAT or IMGG – two OTC stocks that we’ve been getting quite a bit of reader mail about recently. If it’s a busy day, you could see the bid or ask tick up and down a bit, with a few thousand shares exchanging hands over the course of the morning. But then there are the slow days, when the stock barely moves at all…with a painfully large spread.

That’s nothing to worry about. Just remember this: If there’s no unusual volume backing up a drop, chances are the move won’t hold. Sometimes you’ll see a “shake” — the stock price taking a dive on the sale of just a few hundred shares. Don’t fall into this trap and sell…prices will more than likely return to previous levels sooner, rather than later.

Cheers,
Jonas Elmerraji

September 25, 2009

Why Volatility Equals Profits for Small-Cap Stocks was originally featured in the Penny Sleuth.

With the small-cap research tool I’m about to show you, you’re well on your way to seeing how the market moves ahead of the herd.

Here’s everything you need to know…

A while back, I wrote to you about our Small-Cap Recovery Index. The index is composed of fundamental data from 100 small-cap stocks, as well as economic factors like unemployment and personal savings rate.

It’s designed to give us a glimpse at signs of recovery for the stock market.

While the market has rebounded in a big way since it bottomed in March, many investors are concerned that stock prices are already getting out of whack. But we’ve designed the Small-Cap Recovery Index to go beyond share prices.

Unlike major indexes — like the S&P 500 or small-cap Russell 2000 — ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement. The majority of the index is based on the latest available fundamental performance.

But while gauging how “healthy” the market is can be very valuable, the Small-Cap Recovery Index provides us with considerably more data. In fact, as we continue to watch the index, we hope to use the information it provides to not only peg where the broad market is headed, but which industries hold the keys to growth.

We can accomplish this thanks to the predictive power of small-cap stocks. You see, historically, penny stocks lead the stock market out of recession. “From 1943–2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explained Ken Kurson in an article published on Esquire.com a few months back.

By monitoring how small caps perform fundamentally and technically, we can essentially predict where more major indexes — the S&P 500, for instance — are headed.

Now, 12 weeks into collecting and analyzing our data, we’ve already caught some indications that the index is doing its job. More on that in a bit…

A Look at the Small-Cap Market

The chart above shows the Small-Cap Recovery Index for the last 12 weeks. The index, which is calculated daily after the market close, is based on a 100 scale — its current value of 107.4 means that the Small-Cap Recovery Index has gained 7.4% since we began tracking it.

While a high number for the S&P 500, which just measures share prices, could suggest that stocks are overvalued, when it comes to the Small-Cap Recovery Index, bigger is definitely better. That’s because a higher number means that the small caps that make up our index are performing well for investors and — more importantly in this environment — performing well from a financial and economic perspective.

In the past couple of months, the index has seen its value increase materially, which is a very good thing. But while the SCRI’s value gives us a good idea of how small caps are performing, it doesn’t do a very good job of actually predicting where the markets will move next. That’s where the oscillator comes in…

The Small-Cap Recovery Index Oscillator

The Small-Cap Recovery Index Oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 — meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down.

We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous to detail here, we’ve determined that if you had used those rules to invest in the ProShares Ultra S&P 500 ETF (NYSEArca: SSO) or the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.26%!

And right now, with the oscillator (the blue line in the graph below) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong — we’re still in the early stages of collecting data and testing its accuracy.

So what’s the SCRI Oscillator telling us right now?

While it’s good that the SCRI has increased in the last 12 weeks, a quick look at the oscillator shows us that the S&P 500 has increased much more quickly — that’s actually a bad thing for the market because it means that investors have overvalued the S&P against the fundamentals of the market.

And already, we’re seeing the S&P 500 start to decline to fall back in line with the Small-Cap Recovery Index. Unless big stocks improve their fundamentals enough to match the small-caps, it’s time to expect a tumble in the S&P back to SCRI levels. We still have considerable data to collect before we begin to use SCRI data in our stock picking methodology, but right now, it’s clear that the index could soon become a very powerful tool in our investment arsenal.

Cheers,
Jonas Elmerraji

September 10, 2009

Update: The Only Tool You Need to Predict the Market’s Moves was originally featured in the Penny Sleuth.

That’s certainly not the case today. In fact, it’s difficult for the average person to imagine life without 24-hour access to his bank account. More than half of American adults use ATMs an average of eight times per month. That’s millions of transactions every single month…

Cash machines are also big business. Technology, installation and maintenance are all a part of the game. We’ve found one penny stock that’s posting consistent profits with its ATM business. It’s been so successful recently that it’s now preparing to expand its business into other types of self-serve kiosks.

In addition to its stellar fundamentals, if this stock continues its hot streak, you could very well see triple-digit gains in as little as eight-12 weeks…

I’ll tell you how to get the name in just a minute, but first, let me show you just how much potential this stock has for your small-cap portfolio…

Plenty of Positive Momentum in the Cash Business

The company I’m talking about is a bulletin board company in the ATM business. The company owns and operates around 4,300 ATMs and other self-service kiosks across the country.

It’s stock is so small that it’s not on most investors’ radars at all. But even though its market capitalization is less than $20 million, it is beginning to attract some attention. The Jacksonville, Fla.-based company’s local business paper is even catching on to the company’s consistently stellar performance…

“Earnings have nine quarters of positive momentum, and in the last quarter were up nearly 24%, to $557,000, with less debt and more cash,” according to the Jacksonville Business Journal. “Management thinks the company is finally in good shape.”

We think so too. All it takes is one look at this stock’s fundamentals. The consistent profits are impressive for such a small company. As is its steadily growing cash position. The company has also nearly doubled its net profit margin in only one year. On top of these numbers, this ATM operator is trading at a low multiple considering its growth potential, only 0.8 times sales.

While we don’t expect any big increases in the cash machine business as a whole, it’s stable and lucrative…and that’s all we need it to be.

Despite the maturity and relative stability of the ATM industry, our stock continues to add to its ATM customer base, and the company has additional plans to grow the company and shareholder value that we’ll reveal in just a minute…

In fact, just last week, they signed a three-year contract to place ATMs in 51 stores in a national grocery store franchise. The company values the contract at more than $750,000 per year.

This new deal should easily make up for the 8% decrease in revenue it posted in Q2 due to the loss of an account.

The Ground Floor: A New Generation of Automated Service Machines

We are entering an ideal time frame in which to purchase shares of this exciting stock. Its far-reaching ATM business is the company’s backbone, providing strong revenue and cash flow to support expansion.

Then there’s this secondary growth opportunity…

Right now, this company is in the midst of a multiyear effort to ramp up profits from its core business and expand into other self-service niches. Following in the footsteps of Redbox, the Coinstar-owned DVD rental booths, this company has begun a DVD rental kiosk pilot program on its home turf in Jacksonville, Fla.

We like this foray into the kiosk rental market. It’s a niche that has the ability to perform very well during almost any economic climate. DVD sales are down double-digits this year as consumers continue to tighten spending habits. But rental revenue is up more than 8% across the industry. Spending $1 a night on a DVD rental from a kiosk is an easy choice compared with what a consumer would spend buying or going to a theater.

Expect to see more positive news about this DVD kiosk pilot program in the near future. The company has already announced it has expanded the program from nine to 24 locations. Management has also been touting an aggressive ad campaign set to begin soon…

“Management continues to invest in our sales and marketing capabilities with the goal of expanding our network,” this group’s CEO told the Business Journal. “Simultaneously, we are focused on adding additional services to accelerate our growth. We continue to focus on leveraging our ability to deploy, manage, maintain and process transactions from a wider range of self-service kiosks beyond the traditional ATM.”

This Rally Is Ready to Continue…

And this stock’s chart looks attractive right now, as well. Shares have been unstoppable since the beginning of 2009 — and their price has rocketed an amazing 513.8% since January.

But that doesn’t mean that this rally is over…

Right now, the stock is in a sustained uptrend — a sign to technical analysts that there’s still plenty of room for growth despite the impressive numbers the stock has returned.

Despite the colossal run-up the stock has already given its investors this year, the company’s chart indicates that things are still full steam ahead. And the company’s fundamentals back that up in a big way…

I released the name of this stock to my Bulletin Board Elite readers last Friday. Since then, the stock has already put 14% in their pockets, and like I said before, I expect it to do much better than that.

If you want to get this name – and the rest of my under-the-radar stock portfolio – just click here to get the full details from Bulletin Board Elite.

Best,
Greg Guenthner

September 4, 2009

Grab Triple-Digit Gains with This OTC Cash Machine Play was originally featured in the Penny Sleuth.

Without a doubt, the most common reader questions we get here at the Penny Sleuth are about brokers. That’s really no surprise – for a new investor the broker business is one of the most complex parts of the investing process. But that’s only because, all too often, new investors don’t understand these “Broker Basics.”

Here’s a look at what you need to know about the brokerage world to make profitable investment choices…

Imagine sitting in front of your computer as a new investor with a phenomenal investment idea – a stock with a groundbreaking product that’s about to take off, no debt, and an undervalued share price. It’s an investment that could easily double this year.

But actually parlaying your money into your dream pick isn’t necessarily so simple — the brokerage business is mired in complicated terminology, intimidating risks, and bureaucratic red tape, after all. That’s about to change for you…

A Look at the Brokerage Business

There’s no question that all brokers aren’t created equal. In fact, picking one broker over another could end up saving you – or costing you – a serious chunk of your investment gains. But that said, their jobs are all essentially the same.

Brokers are middlemen who execute orders for stocks, bonds, ETFs, and other securities for their clients. In their simplest form, brokers make their living by charging a commission for every trade they put through for you. Keep that fact in mind – most brokers have a vested interest in seeing you churn your portfolio and pay-up big commissions in the process.

Picking a reputable broker usually isn’t something you have to worry about. Brokers are regulated by the Securities and Exchange Commission (SEC), which keeps a public directory of brokers, as well as any complaints against them.

The Securities Investor Protection Corporation (SIPC) protects brokerage accounts of up to $500,000, just as the FDIC insures your checking account. And while that doesn’t mean that you can’t lose money when a stock price falls, it does mean that your portfolio is protected from being looted by your broker.

That’s not to say that dishonest brokers are common – even the brokerage arm of Bernie Madoff’s firm was a legitimate business, one that was recently sold off to another broker-dealer to scrounge up more funds for Madoff’s investment advisory victims.

The bottom line is this: by ensuring that your stock broker is registered with the SEC and is a member of the SIPC, you all but eliminate the risk of being scammed by your broker.

If you want to find the best bargain in brokerage, take a look at the Penny Sleuth’s 2009 Broker Guide.

The Tricks to Trading Penny Stocks

In this day in age, there’s very little reason to pick up the phone to call your broker anymore. That’s because in the last two decades, online trading has emerged as an inexpensive, reliable, and efficient way to execute stock trades. Every major brokerage firm offers online trades – if yours doesn’t, consider that a major red flag.

Talking to a broker in person may be a good way to assuage your pre-trade anxiety, but it’s also a great way to smash your investing profits from the start. Phone orders can typically cost 400% more than online orders for a service that provides almost no benefits over online trades.

Many investors are concerned that they won’t be able to trade penny stocks without consulting their brokers by phone. But that’s simply not the case.

Online brokerage platforms give investors the opportunity to pick up shares in major listed stocks, as well as penny stocks that trade on the pink sheets or over the counter. If you’re having trouble finding a particular penny stock, feel free to call your broker for assistance, but by all means, execute the trade online and avoid the huge phone commissions.

Final Thoughts

Some of the most exciting small-cap opportunities right now are in foreign stocks. And as with penny stocks, you can buy or sell shares of foreign companies completely online through your broker.

If you live in a country other than the United States, however attempting to open a U.S. brokerage account could entail quite a lot of paperwork. The Patriot Act severely tightened banking and investing laws, and as a result financial institutions are required to know exactly who their clients are as well as where their money is coming from in order to curtail money laundering. That said, brokers in nearly every other country have access to U.S. exchanges, though their regulation may not be as stringent as it is here.

For the vast majority of investors, selecting the right broker is merely a matter of personal preference. As long as your broker is kept in check by the SEC and insured by the SIPC, you don’t need to worry much about the safety of your money. But your money can evaporate pretty quickly if you’re handing over outlandish commissions every time your place a trade.

Don’t be tricked into thinking that you can’t execute complicated orders for obscure stocks online – you can. And it’ll save you a fortune in trading fees.

Cheers,
Jonas Elmerraji

August 27, 2009

Make Profitable Investments by Understanding “Broker Basics” was originally featured in the Penny Sleuth.

While that may sound like a very specific prediction for a market that’s been anything but predictable this year, thanks to our newest investing tool we’ve got a little bit of added insight into where the market’s headed in the short term.

A few weeks back, I wrote to you about the Small-Cap Recovery Index that Penny Stock Fortunes editors Greg Guenthner, Jim Nelson and I have been working on here at Agora Financial HQ.  The index was designed to use the predictive power of small-cap stocks and leading economic indicators to give us some clues as to when we might get our first glimpse at economic recovery.

That’s because historically, small-caps lead the way out of recessions. When big stocks are still in the throws of economic trouble, the smallest, most nimble companies are already climbing into prosperity. And as we gather data, we’re on the road to seeing just how well our index will be able to use that knowledge to our advantage.

Here’s the first look at our index so far:

For the last few months, our database has been compiling market and economic data daily, and establishing the baseline that we’ll be using to analyze the market at large. It’s exciting stuff, and just two weeks ago it became even more interesting…

In addition to predicting where the economy is going, we’ve been experimenting with the predictive ability of our Small-Cap Recovery Index on other parts of the stock market.

To that end, we’ve recently been taking a look at the Small-Cap Recovery Index Oscillator. The oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 – meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down. And thus far, our expectations have been met:

Here’s where things get interesting… We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous – and boring – to detail here, we’ve determined that if you had used those rules to invest in the ProProShares Ultra S&P500 ETF (NYSE: SSO) or the ProShares UltraShort S&P500 ETF (NYSE: SDS) depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.52%!

And right now, with the oscillator (the blue line in the graph above) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong – we’re still in the early stages of collecting data and testing its accuracy.

So far, though, the Small-Cap Recovery Index Oscillator has been incredibly precise with its buy and sell signals. If it’s right again, it’s time to get back into shares of SDS.

Cheers,
Jonas Elmerraji

August 21, 2009

Scoring 36% Gains in Six Weeks with Our Favorite Small-Cap Tool was originally featured in the Penny Sleuth.

Even though the Internet as we know it is only a couple of decades old, this is still a difficult scenario to comprehend. Entire businesses – literally thousands upon thousands of jobs – exist because of the web.

Now we’re entering an age of Web convergence. Every single element of our old media – radio, television and print – is migrating to the Internet at breakneck speeds.

Within the next five years, the depth of offerings on the Internet and the global population connected to them will grow exponentially. In fact, the worldwide Internet economy is now growing at such a rate it will be next to impossible for content providers to keep up…

Bandwidth is being eaten up left and right by more data-intensive offerings, such as streaming video. Young people are also gobbling up Internet media. Young adults today are getting more and more of their news, sports and video directly on their computers. A recent study claims that those born between 1981-1992 get 34% of their news from the Internet, compared with only 11% from print newspapers.

Then there are the masses in emerging economies like China. China became the world’s top Internet user last year, passing the United States. The number of Chinese hooking up to the Internet for the first time is staggering, growing 42% last year alone, to nearly 300 million users, according to the China Internet Network Information Center. Now the government is setting its online ambitions toward the countryside, vowing to hook up every village with broadband lines by 2010.

In all of Asia, only 17% of the population has Internet access, according to Internet World Stats. Compare that with 75% penetration here in North America. This shows that there is plenty of room for tremendous growth…

Partnering With the Biggest Names in Media…

We’ve written to you before on the topic of bandwidth scarcity. And Penny Stock Fortunes readers already had the opportunity to score quick double-digit gains playing this trend with Internet data handler Soapstone Networks Inc. (OTC:SOAP).

Now we’re looking to play a different side of the bandwidth scarcity coin. This time, content delivery and media integration are our targets…specifically, video delivery outsourcing. As we’ve told you before, it’s a highly competitive field, but that’s where the real money is…

That’s why we’re moving one content delivery company off the Penny Stock Fortunes watch list and marking it a strong buy. This company is a content delivery network (CDN) provider for some of the largest media companies in the world. Its customer list includes big media mainstays such as MSNBC, Disney, Netflix and Fox. The company also boasts the biggest fish of them all. Its No. 1 customer is Microsoft – a company that is now locked into an all-out war against rival Google for web supremacy.

And lucrative contracts with these heavy hitters has helped the company grow its revenue more than 500% over the past three years.

Its most recent quarter proved how recession-resistant this content-delivery provider really is. While it still isn’t cash flow positive yet, its Q2 net loss was cut by two-thirds. The company grew its top line 7%, while the rest of the economy is still contracting.

And for a growing company in the tech sector, this company’s balance sheet is incredibly clean. The company is sitting on more than $145 million in cash and zero long-term debt.

The stock’s recent acquisition of another leading firm has even allowed the company to expand its offerings to mobile devices.

This is a massive market. According to networking giant Cisco, mobile video and other bandwidth-heavy features will drive worldwide mobile traffic to more than 1 exabyte per month by 2012. An exabyte is equal to 1 billion gigabytes…that’s a heck of a lot of data.

We just revealed this latest pick and more to our Penny Stock Fortunes readers – if you want to take a look, just click here for more details…

Best,
Greg Guenthner

August 17, 2009

Taking Advantage of the “New Media” Boom was originally featured in the Penny Sleuth.

Though that sounds like science fiction, it’s actually not that far from reality thanks to the latest addition to our investing arsenal. It’s one of the most powerful investing tools that we have at our disposal… And after months of research, development, and testing, it’s finally ready to be put to work.

More importantly, I can finally share it with you.

But first, let me give you some background…

Historically, penny stocks lead the stock market out of recession. “…from 1943 to 2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explains Ken Kurson in an article published on Esquire.com last week.

That fact in mind, Penny Stock Fortunes editors Greg Guenthner, Jim Nelson, and I set out to create a tool that uses cold, hard numbers to point us toward recovery – and profits.

And while we only set out to predict the start of recovery, we’ve found that our tool is far more robust than that.

With it, we will be able to better gauge where the market’s going in the medium term and position ourselves accordingly. We’ll be able to see which industries will recover first – and we’ll be able to get into them before the rest of the market shows signs of a move.

Ultimately, this tool will point us toward the investments that have the biggest profit potential right when they’re ready to take off. I’m guessing you’re ready to hear exactly what this tool is…

I’m talking about our small-cap recovery index.

This project is a complicated one. It involves the selection of hundreds of stocks and additional metrics – like unemployment and savings rates. Once these benchmarks are selected and compiled, we will begin to see a picture developing that will reveal investor sentiment and market performance. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.

Unlike major indexes – like the S&P 500 or small-cap Russell 2000 – ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement.

Right now, one of the most popular economic forecasting tools is the Index of Leading Indicators, which is compiled by The Conference Board. While the index helps economists gauge where the economy is headed in the future, it eschews the predictive power of small-caps, and includes a number of metrics that are too slow moving for our purposes. The Index of Leading Indicators was designed to give a glimpse of where the economy is headed… our small-cap recovery index focuses on when specific stocks are about to move.

Small stocks are nimble and able to adapt – and a recovery in our sector is usually a telltale signal to mainstream investors – letting them know it’s a bit safer to test the waters of the market.

That’s why we have to be ready to make our moves. When the penny stock market moves – as it did this spring – it does so in a big hurry. The largest gains will go to those who are ready to pounce on shares early…

Right now, our database compiles the latest economic and market data every day… we’re waiting to get a statistically significant amount of data before we go public with the index.

Naturally, our Penny Stock Fortunes readers are going to be the first to learn what our small-cap recovery index tells us about the state of the market, but I can assure you that this isn’t the last time you hear about this exciting new tool here in the Penny Sleuth.

Cheers,
Jonas Elmerraji

July 29, 2009

Get Your Window to the Future with Our Newest Investing Tool was originally featured in the Penny Sleuth.