“[During a recession] small stocks outperformed T-Bills, bonds, and the S&P about two-thirds of the time — and they did so by a ridiculous margin,” claims the Motley Fool’s Ilan Moscovitz.

While safe, stable stocks are usually the first place investors flock to when markets turn sour, maybe you should be taking another look at penny stocks. As “blue chips” like GM and AIG crumbled under the strain of the credit crunch, a large number of penny stocks were making a small group of investors a fortune.

If the true test of an investment is a bad economy, what better time was there to demonstrate that theory than the last 12 months? Over the course of the last year, we’ve seen the market falter, absorb bad news, and crash harder than it’s fallen in three generations. And while stocks took a big hit across the board, here’s a look at the small stocks that fared well:

A Mix of Businesses

The stocks listed above have been limited to the highest performing small-caps over the last 12 months that have a decent trading volume. As you can see from their names, there’s a pretty varied mix of businesses in the group…

Like Explorations Group (OTC: EXGI), a company that acquires and manages parking lots and garages in New York City. Or Zagg (OTC: ZAGG), a company that makes protective coverings for iPods that I mentioned here in the Penny Sleuth last week.

While there isn’t any single industry that rules this list, these stocks actually do have something important in common – they each have real, revenue-generating businesses.

That may sound like an obvious thing to look for in a stock, but in the penny stock universe, it’s not uncommon to run across hundreds of shell companies that actively trade over-the-counter. Some of those shell companies have plans to enter some exciting businesses; others are a money pit for investors who are willing to believe their hype.

Getting Your Stock on Next Year’s List

If you want to dodge the hype and find a penny stock that will make next year’s list, here are a couple simple rules to keep in mind…

For starters, only invest in penny stocks that have a real, revenue-generating business. It’s true that people have made millions by speculating on long-shot penny stocks, but more people have gotten burned trying to recreate their successes.

And know when to sell… Lots of penny stock investors see 200%, 500%, even 1,000% gains on a stock but still end up losing money in the end. It’s not because they didn’t plan their buys properly…it’s because they got greedy!

It doesn’t matter how much money a stock makes if you’re not ready to press the button and realize those gains. That’s why you need to set solid exit points for any penny stock you buy.

It’s human nature to want to hold onto an investment as you see it climb with no end in sight, but doing that is a great way to miss out if that trend turns around. When you analyze an investment, think about a logical exit price and sell for that. Picking solid exit points will become easier as you develop your investing chops.

Cheers,
Jonas Elmerraji

June 10, 2009

Jonas Elmerraji

Jonas Elmerraji is the managing editor of the Penny Sleuth, and an editor of Penny Stock Fortunes. Jonas also occasionally contributes to financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and MSNBC.com among others. Before joining Agora Financial, Jonas worked at an investment management firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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