Every week, we drum up a list of penny stocks that are exhibiting abnormal volume, strong technicals, upcoming news, or another catalyst that suggested they might be making a material move in the coming week.

Last week was no exception – investors who played our GeoGlobal Resources (AMEX: GGR) pick had the chance to make 17.32% in the last give trading days…

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 again 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…

Watch your email inbox to see if you’re one of this week’s winners…

Now, let’s cut to the chase and take a look at four penny stocks worth watching in the coming week:

Youbet.com (NASDAQ: UBET) – This online wagering company offers a service for its customers allowing them to securely bet on horse races at more than 150 racetracks worldwide. But are you willing to bet on this stock? Shares have recently broken out right at resistance amid significant positive volume. With the market opening strong this week, shares should continue to climb.

Waste Services (NASDAQ: WSII) – While the company may focus on trash, this stock is anything but. Increased positive trading volume and bullish technicals helped Waste Services make this week’s cut. Consider picking up shares after a dip.

ESCO Technologies (NYSE: ESE) – On the short side of things, scientific product supplier ESCO is currently showing investors a very bearish set of technical patterns right now. After posting dismal quarterly results, traders jumped on a triple top that had been forming for the last couple of months, pushing the stock through its support line (blue above), and prompting even more traders to sell off shares at Friday’s open. At current levels, this stock still has further to fall.

Western Alliance Bancorporation (NYSE: WAL) – This $300 million regional banking stock has seen its numbers fall ever since the credit crunch heightened. And now, with profit margins still 38.5% underwater, this stock has attracted trader attention. WAL could easily see another significant drop this week.

Share Your Penny Stock Picks

Once again, we’re going interactive this week…

Just post your recommendation in the comments section of this article between now and the market’s close on Friday, November 20 to share your favorite penny stock play with the rest of the world.

Cheers,
Jonas Elmerraji

November 16, 2009

Monday Penny Stock Watchlist: Bet on This Betting Stock was originally featured in the Penny Sleuth.

Every week, we drum up a list of penny stocks that are exhibiting abnormal volume, strong technicals, upcoming news, or another catalyst that suggested they might be making a material move in the coming week.

With investors’ interest in the market rekindled after a strong week for stocks, it’s time to look at four stocks that are set to move right now.

First, let’s see how last week’s Watchlist performed. Last week, all five stocks on our Watchlist moved in the direction we predicted on Monday, with one stock – LiveDeal (NASDAQ: LIVE) – brining in as much as 11.4% returns in just five trading sessions.

That’s a compound annual growth rate of more than 273%!

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…

Bringing in the top honors last week was Penny Sleuth reader Stanley S., whose Continental Prison (PINK: CPSZ) pick brought in 71.4% returns last week. Also in the winner’s circle was Sandra M., who eeked out a 30% jump in San West (OTC: SNWT) and Louise, whose BioLargo (OTC: BLGO) pick raked in 33%. All three 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:

American Science & Engineering (NASDAQ: ASEI) – This Massachusetts-based security stock delivered awesome second quarter earnings last week, prompting buyers to go on a rally, and pushing shares up more than 7% on Friday. Expect strong technicals and buyer sentiment to keep this stock rising in the coming week.

GeoGlobal Resources (AMEX: GGR) – This $91 million oil and gas exploration company focuses on finding commodity reserves in India. And while they’re far from profitable at the moment, as far as an intraweek play is concerned, the bullish technicals and uptick in volume on this stock right now make a good enough case for picking up shares.

Video Display Corp (NASDAQ: VIDE) – Video Display Corporation is a designer, manufacturer and supplier of CRT and flat panel display devices. While Video Display Corp. is higher on the volatility spectrum than our other Watchlist stocks this week, increased investor visibility should serve shareholders well.

Global-Tech Advanced Innovations (NASDAQ: GAI) – This week’s only short play, Global-Tech Advanced Innovations is a Chinese consumer products maker. This low-volume stock is currently trading just under significant resistance at its 200-day moving average. Watch for this stock to hit its head on resistance – otherwise an upward breakout could hurt those betting against the stock. Watch this one closely if you decide to play it.

How to Play SFNL

Penny Sleuth reader Mark D. wants your help this week:

“I would like to see your thoughts on a small company in the electronic payment processing business, Secured Financial Network (OTC: SFNL), the float is roughly 28M and tightly held so it trades thin, chart indicates long term accumulation and the company does not engage in putting out fluffbomb PRs and is growing Q over Q even during the current economic crisis. I am a long term holder in that stock and would like to hear your opinion on it…”

Have an opinion about SFNL? Just post your analysis in the comments section of this article. You can even post your favorite penny stock pick at the same time…

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 13. The two readers with the best performing picks each score a Special Edition DVD of the award-winning documentary.

Cheers,
Jonas Elmerraji

November 9, 2009

Monday Penny Stock Watchlist: Four Stocks Worth Watching This Week was originally featured in the Penny Sleuth.

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.

Unfortunately, most businesses resort to lay-offs during tough times. But in service-oriented business like retail, banking and entertainment, someone still needs to provide customer service and support.

That’s where the machines come in…

Retail, hospitality and health care businesses spent $2.8 billion on self-service technology last year, according to VDC Research Group. This spending is expected to grow 15% annually over the next four years.

It’s no surprise that businesses would turn to automated help during tough times. Transactions made using an automated system such as a ticket booth or automated teller machine cost a tenth of what the very same transaction would cost if it involved a human employee, according to The Economist.

Small-cap standout Coinstar Inc. (NASDAQ: CSTR) is an obvious choice in this sector. If you’ve set foot inside a grocery store or fast food restaurant in the past few years, you’ve probably seen one of Coinstar’s machines.

The company’s namesake machine automatically converts your spare change into cash or gift certificates to various popular stores, keeping several cents for every dollar in the transaction.  But the company also owns Redbox, the self-service movie rental kiosk found in fast-food restaurants and other retail locations.

Coinstar’s purchase of the Redbox brand fits in beautifully with its business model. After all, the kiosk rental market looks very strong right now. It’s a niche in the automated services industry 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. After all, 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.

Coinstar enjoys fat margins and growing profitability because it can employ a lean technical support staff. Fewer salaries, and in these days of rocketing insurance costs, fewer benefit expenses can go a long way.

Providing a meaningful, convenient machine-based service can also strengthen customer loyalty. An impressive 85% of customers prefer brands that offer self-service technology, according to The Economist. The last thing anyone wants to do is wait in a long line. Fast, reliable kiosk service isn’t just a way to save money—it’s a better way to cultivate satisfied customers.

Best,
Greg Guenthner

October 29, 2009

Profit From the Rise of the Machines was originally featured in the Penny Sleuth.

Here’s our list of penny stocks to watch for the coming week.

Last week, we told you to watch five stocks – three long and two short – that exhibiting abnormal volume, strong technicals, upcoming news, or another catalyst that suggested they might be making a material move in the coming week. Sure enough, four out of five of our watchlist stocks moved in line with our expectations, generating an overall average gain of 6% in just a week – that’s 312% annually!

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 Randy Moory, who recommended shares of China Finance (OTC: CHFI) for a 235% gain and L. West, whose XTEND Medical Corp. (PINK: XMDC) recommendation yielded a 150% gain. 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:

Synovus Financial (NYSE: SNV) – Synovus has been having a rough year in 2009. Since January, shares of this regional bank have slipped nearly 67%. And investors shouldn’t expect that trend to change anytime soon. The beginnings of a bearish descending triangle are starting to appear, and newfound resistance at the stock’s 50-day moving average is a good sign for Synovus’ short sellers. This stock could ultimately fall to $2.50 before finding any kind of support.

United America Indemnity (NASDAQ: INDM) – While insurers took their knocks last year along side the rest of the financial sector, things are looking up for United America Indemnity. A swing to thick margins in the company’s third quarter financials prompted investors to turn bullish on this stock, and the technicals are now starting to support a case for going long. Watch the increased volume on this play.

Middleburg Financial (NASDAQ: MBRG) – Middleburg is another financial stock that has made this week’s list. This regional banking company may be small, but with operations based in one of the most affluent parts of Virginia and still strong margins, this bank should continue to do well as investors pile into shares. It’s worth noting that MBRG is thinly traded, so it’s more volatile than most of our watchlist plays.

Fusion Telecommunications (OTC: FSNN) – This small over-the-counter VOIP operator has been rallying hard lately, pushing up nearly 42% in the last three months alone. While FSNN’s financial’s make the stock a somewhat dubious long-term play, the short term financials look strong enough to sustain a rally through Friday.

Hallwood Group (AMEX: HWG) – This textile and energy holding company may be small and under the radar, but traders have taken note recently pushing share up 145% in the last quarter. While the volume is thin on this stock as well, the technicals look enticing enough to make this week’s watchlist.

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, October 30. The two readers with the best performing picks each score a Special Edition DVD of the award-winning documentary.

Cheers,
Jonas Elmerraji

October 26, 2009

Monday Penny Stock Watchlist: Don’t Miss These Five Small-Caps 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.

And this week, we’re going interactive. Share your favorite small-cap play for the chance to win a free copy of I.O.U.S.A. More on that in a minute…

These stocks are exhibiting abnormal volume, strong technicals, upcoming news, or another catalyst that suggests they might be making a material move in the coming week.

Gold Reserve (NYSE:GRZ) – This tiny exploration and mining company is focused on its projects in Venezuela, and has benefited in a big way from the gold hype of the last few weeks. As a result, shares are up 98% in the last three months.

The technicals look good for this stock as well. GRZ rallied hard as gold fever began to catch, and is currently toward the end of a flag continuation pattern. That suggests that this stock is going to push higher – possibly even by the end of the week. Strong volume early in Monday’s trading looks like that prognosis should hold true.

GTx Inc. (NASDAQ:GTXI) – Pharmaceuticals have been big lately (and have even contributed to quite a bit of Penny Stock Fortunes’ gains), and the outlook for GTx Inc. is no different. This drug developer is looking at increased investor activity after taking its knocks in the last month or so. A reversal could be big for investors who are in the right place at the right time.

The Geo Group (NYSE:GEO) – Crime is big business, and not just for the criminals. Companies are also getting a taste of the crime business as they step into roles as government contractors. The Geo Group, which operates prisons in the U.S., Canada, Australia, and South Africa, is just such a company. The stock gapped up Monday morning on higher volume from investors, and the stock doesn’t show any signs of slowing down. This company could be a worthwhile intraweek play.

Exterran Holdings (NYSE:EXH) – Shares of natural gas company Exterran Holdings are down following Barron’s realization that the company could be overvalued by as much as 40%. This potential short opportunity flies in the face of conventional wisdom, which has had investors placing bets on natural gas companies as the commodity itself gained on trading floors across the world. But with the reach of a publication like Barron’s, expect investors to be wary of this small-cap for a while… Shares could dip more before the week is over.

Ultratech (NASDAQ:UTEK) – Last week, Ultratech hit a “double top” – a bearish technical pattern that points to a big drop in share prices. Sure enough, shares fell in the last couple of trading sessions as a result. But if the technicals hold for this small-cap semiconductor play, this stock has further to fall. With analyst day scheduled for October 21, the catalyst could come sooner rather than later.

Share Your Penny Stock Picks

This week, to usher in our new weekly Penny Stock Watchlist, the Penny Sleuth is giving you a chance to talk about your favorite small-cap play – and 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, October 23. The two readers with the best performing picks each score a Special Edition DVD of the award-winning documentary.

Hurry, though – the sooner you post your pick, the bigger its chance to appreciate. Good Luck!

Cheers,
Jonas Elmerraji

October 19, 2009

Monday Penny Stock Watchlist: Five Stocks to Watch This Week, Plus Score a FREE Copy of I.O.U.S.A. was originally featured in the Penny Sleuth.

Earlier this week, battery maker A123 Systems (NASDAQ: AONE) commenced public trading of its shares, raising more than $340 million in the largest IPO of 2009. Those who got into the stock early have been rewarded handsomely – shares are up nearly 70% right now. But AONE is only the latest in a string of initial public offerings that capped off the biggest week in IPOs since 2007.

To be fair, that hasn’t been a difficult benchmark to beat. Since the fallout from the credit crunch began, the IPO market has deteriorated to the point where only a single U.S. company went public in both the last quarter of 2008 and the first quarter of 2009. Things heated up again last quarter with 13 public offerings, but those numbers still paled in comparison to the 95 stocks that traded for the first time in the last quarter of 2007. Now, with murmurings of the recession’s end upon us, the bullish signals from an IPO resurgence shouldn’t be ignored.

Not everyone agrees with that prognosis…

“The fact that the many in the media are classifying three IPOs as a resurgence is evidence of how low our expectations have become,” National Venture Capital Association President Mark Heesen said in a statement picked up by Reuters.

“[This] not the direction we hoped to see. While the psychology of the market is trending positive, our original forecast of a true recovery not beginning until 2010 still unfortunately holds true,” he continued.

And while Heesen’s concerns about the IPO market’s recovery have been echoed throughout Wall Street this week, it’s inaccurate to say that a recovery in public offerings isn’t happening right before us. At the start of this week there had been 11 new public offerings in the third quarter of 2009. That’s a huge departure from the nearly post-mortem IPO market that we were in the midst of six months ago.

IPO bears lost more credibility on Wednesday when Talecris Biotherapeutics (NASDAQ: TLCR) went public, breaking the year’s domestic IPO record for the second time this week. The biopharma stock raised $950 million in its offering, the biggest IPO for the sector since 2006. The Talecris offering comes after China State Construction Engineering Corp’s record-breaking $7.34 billion IPO on the Shanghai Stock Exchange, and a week ahead of Banco Santander’s public offering next week, which at $7.25 billion will once again bust the year’s record for the biggest American-traded IPO.

What were the “experts” saying about a dead IPO market until 2010?

And with some exciting companies filing to go public in the coming months – including NewEgg.com and Dollar General – things aren’t slowing down yet. To be clear, a strong IPO market doesn’t necessarily say much about stocks in general. The S&P 500 has already slumped 2% this week despite all of the offering activity that’s happening before us. It does bode well for small-cap stocks, however…

There’s a big argument going on right now among the vast majority of investors: some are claiming that the market is perfectly primed for a 10 year bull rally, while others are bracing for the next market correction. But in the small-cap world, things move very differently. Every single U.S. IPO this year has been a small-cap stock, which tells me that the investment banking syndicates – which have some of the most advanced market data available – are bullish on small-caps.

Why does IPO activity suggest where the big investment banks are putting their money? Studies by Nobel Prize winning economists Franco Modigliani and Merton Miller showed that, historically, investment banking syndicates and venture capital firms will not push companies to go public in a down market. That phenomenon actually makes a lot of sense, because in a bear market, investors are willing to contribute far less money to a stock’s underwriting premium – the “commission” that an investment bank gets by selling an IPO’s shares for more than they paid.

By unleashing primarily small-cap IPOs so far this year, evidence points to growth opportunities in the small-cap space.

So, how do you make a play off the potential of penny stocks? Look for small-cap plays that remain deeply undervalued to capitalize on the buying that’s going on right now. That’s a more difficult prescription than it was six months ago before the market rally, but ignored penny stocks still remain one of the last vestiges of value right now.

It’s also important to keep in mind that sentiment is prone to change. While small-caps might be a favored market space right now, a huge drop in the rest of the market will undoubtedly take penny stocks with it. We’ll continue to watch broad moves with our Small-Cap Recovery Index for that very reason.

There’s little question that IPOs are having a fantastic quarter, one that will break records for the year once all of the numbers are crunched. And as long as the industry’s experts continue to be disappointed in the wake of unrealistic expectations, most investors will miss the growth sentiment in small-caps. That makes right now a perfect time to position your portfolio.

Cheers,
Jonas Elmerraji

October 2, 2009

Why the Latest Trend in IPOs Is Great for Penny Stock Investors 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.