Herein lies our quest with penny stocks. Our goal is to identify the perfect time to buy shares over the course of a company’s development. Get in too early and you could end up holding shares longer than you originally planned. Get in too late, and you might miss the ride…

The idea is to get in before a company begins to experience what I call super-traction. Super-traction is when the dam bursts and huge orders come rushing in — the point where a trend becomes viral. It’s also when your average investor hops on the bandwagon. And if you’re already holding shares, you can come out on top.

Look at the point where Super-traction begins with trendy sandal maker Crocs, Inc. (CROX: NASDAQ):

Right around the time of this small company’s IPO, the company’s revenue and earnings doubled on heavy sales of the company’s trademark lightweight, rubbery shoes. There was no turning back at this point. In the last 12 months, shares of Crocs are up more than 290%:

But getting in before Super-traction catapults the share price is the tricky part. It’s all about realizing when sales are becoming strong, and a (often hidden) catalyst is on the horizon…

We recently found another company with explosive growth potential and is still hidden from many investors. You see, its business is unique. It found a way into the ordinarily secretive Chinese pharmaceutical industry. So far we are up about 33%, but it has far to go. This gem is really cruising under Wall Street’s radar.

Here are the numbers: The industry is growing at 20% per year, and will continue to do so for years to come. If that’s not enough, the company itself is growing at 50% per year, and gaining ground even faster now. We could easily see this one double and even triple by year’s end.

Best,

Greg Guenthner
May 23, 2008

When to Invest in Growing Companies was originally featured in the Penny Sleuth.