While investing in tough times can test your mettle, the bigger test often comes when times are good.
That’s why I like penny stocks. Even though the Dow Jones Industrial Average and the Penny Stock Index are both trading at record highs, I like to remind myself that the best penny stock investors are always a little bit paranoid.
As a penny stock investor, it’s wise to be a little paranoid. Penny stocks are risky. On the other hand, they are also where the next big performers are quietly lurking. That’s why you (hopefully) roll up your sleeves and delve into some good-old fashioned due diligence.
Due diligence’s not worth your time? Think the company’s name alone is a winner? Without due diligence, you’ll probably end up haplessly discovering one of the many dudes skulking in the shadows.
For the most part, I like to look at penny stocks that trade on regulated exchanges, like the OTC-BB, Nasdaq, AMEX, NYSE and TSX. Exchanges where companies have to issue quarterly reports and there is relative transparency.
At the same time, there are some penny stocks whose earnings and balance sheets are virtually non-existent. In these cases, you have to toss your understanding of fundamentals out the window.
These kinds of penny stocks move on press releases and share volume…not on quarterly results.
Without fundamentals how do you get a feel for a company? Between the first impression and due diligence there is some middle ground. And this middle ground can at the very least, give you an understanding of where the company you’re interested in could be heading.
When looking for a company with untapped upside potential, I suggest you look at three (possible) success factors. Come to think of it, if you want to buy a company, you could use these same factors.
Once you have located a penny stock of interest, find out i) their customer type, ii) market share or potential, and iii) growth opportunities.
Each of these factors will help your penny stock in question with new channels for marketing and sales, greater market share, and access to more customers.
If the penny stock you’re interested in does provide fundamentals, focus on those that have little debt. A good cash position and low-debt load means that any unexpected liabilities won’t eventually take over and destroy the company. It gives the company, to some extent, a margin of safety.
And safety is always a good thing when considering riskier stocks.
That is also the joy of penny stocks. If a small player starts to make waves, larger competitors pay attention, and could pay handsomely to acquire that technology.
And if there’s one thing penny stock investors are prepared for, it’s sudden upturns.This article is free for republishing
Source: http://www.articlealley.com/article_138062_19.html
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