Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

But, as with all children, they occasionally run amok. Some fall into the financial hole and can’t get out. Others have great balance sheets but no growth strategy. So, how do you find one that is ready to mature?

Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

With these small companies, you might even have a chance to talk to executives and directors. Give them a call, and see what kind of response you get.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try to format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Be sure to take your time analyzing everything. If a company continues to throw obstacles in its reporting, that might be an indicator to stay away.

Another important task before investing in a penny stock is to analyze the industry it’s in. Small-caps, in general, get tossed around both up and down more than their larger counterparts. If you are looking at a junior precious metals miner, take a look at what the large miners are up to.

Also, make sure you study what, if anything, the underlying asset of the company is doing. Using the junior miner as an example, make sure you are comfortable with the direction the metal the company is mining is going. If you don’t think gold will continue to rise, you probably shouldn’t invest in a gold miner.

Another important factor you should look at is market share. Obviously, most penny stocks don’t control a large share of their market. But make sure the company you are looking at has a strategy for that. And if it doesn’t, make sure that the industry is growing fast enough to create an opening for the company.

The best way to invest in penny stocks is to find niche companies. Usually, large companies leave areas open that just aren’t worth the hassle for the blue chip to fill. That may be the perfect place to build a smaller company. Make sure that niche has enough room to grow in before you invest.

It takes plenty of time and effort to go through all of these important tasks, but the end result is worth it.

Regards,
Mark Louie
September 4, 2008

Researching Penny Stocks was originally featured in the Penny Sleuth.

Armies of analysts don’t cover the small stocks. This leads to piles of unread press releases, innovative new products and fast-growing businesses that go unnoticed by the investing community at-large. It’s a treasure hunt filled with future high-flying companies that no one will bother to find until they become the next hot company on Wall Street.

Now, you can add a new tool to aid you in your quest for smaller stocks with share prices that might be lagging behind their growth potential.

Studies show that a company that beats the number is more likely to do it again in the near future. And according to the Wall Street Journal, investors and analysts are both slow when it comes to reacting to the good news…

If the Street is slow in reacting to the good news within the broader market, it would be safe to assume this lag is especially pronounced in the world of small-cap stocks. And there are plenty of small stocks that offer us earnings surprises every quarter. When I screened for small stocks on the NASDAQ showing a positive earnings surprise in the most recent quarter, almost 100 companies fit the bill.

Here’s the screen:

Last price < $5
Last price > $1
Market Cap < $1 billion
Positive earnings surprise = in the last quarter
Exchange = NASDAQ

Of course, these criteria will just get you started. You could narrow this field of 100 or so stocks by industry, price-to-sales margin or net profit margin to get closer to what you might be looking for. Or, you could tack on this earnings surprise statistic to one of your proven screens.

Remember, it’s those unexpected events, like surprise earnings, that can eventually cause a major price change in a stock. It may go virtually unnoticed once or twice, but investors won’t shy away forever. If you beat them to the punch, you’ll walk away with the big gains.

Best,
Gunner
June 11, 2007

P.S.: We’ll dig deeper into some more hidden small stocks next week. Until then, you can check out all of my latest small-cap stock picks in Penny Stock Fortunes.

P.P.S.: Chris Mayer also takes advantage of the Street’s “learning curve” every month to bring his readers stocks with hidden assets that practically sweat cash.

Quest for Hot Penny Stocks was originally featured in the Penny Sleuth.