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Penny stocks do sometimes pay off, but there are many pitfalls to avoid. As you’ve heard us say often, a lot of penny stocks are little more than very well executed marketing campaigns.
Take a look at the penny stocks in your portfolio. If you’re a penny stock investor you likely have a number of them. The top 10 penny stocks in your portfolio should follow these guidelines:
Tips for analyzing your top 10 penny stocks
- Look for strong management: Look for an experienced management team with a proven ability to develop and finance a mine, product or service.
- Look for a strong balance sheet: High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major financing partner.
- Look for well-financed companies: To profit in penny stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
- Look past the hype: Avoid stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
- Look for stocks trading on a well-regulated exchange: We think you should avoid stocks trading “over-the-counter”, where such things as regulatory reporting are lax. Stick to penny stocks trading on regulated exchanges like the Toronto and New York stock exchanges.
- Look for a results-focused company: Automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on developing a saleable product or service, rather than hyping their story.
- Look for reasonable share prices: Compare the market caps (the total dollar value of all of a company’s outstanding shares) of the stocks with the estimated value of their assets or future earnings streams. Only a few penny stocks will successfully launch a product with enough success to justify the current share price and avoid collapse.
Your top 10 penny stocks will not be marketing ploys
Many penny stocks are little more than very well executed marketing campaigns. Your top 10 penny stocks won’t fall into this category. Many penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.
There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock.
Penny stock promoters love to make deals — however minor or indirect — with major, well-known firms. These deals are aimed at gaining the trust of investors. For example, a penny stock may issue a press release about how Sony, Apple or some other household-name multinational has agreed to sign them up as a “channel partner” to potentially co-market a computer program or electronic gadget. The penny stock hopes that the link with a major brand will give them instant credibility, even if it far from guarantees any sales or profits.
Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a healthy dose of skepticism.
It’s important to be careful, even with your top 10 penny stocks
You can get lucky in penny stocks, just as in lotteries. But if you play long enough, the “house odds” eventually triumph over any run of luck.
Sometimes you might get lucky for a short time: for example, in the early 2000s, buyers of Internet start-ups made far more profit than investors who stuck with well-established companies.
In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.
That’s also why we think you should apply our sell-half rule: Selling half your holdings after you double your earnings is a good strategy for any high-risk investment, but especially so for penny stocks.
How do you feel about investing in your top 10 penny stocks? Do you have confidence in penny stocks or do you avoid them at all costs? Have you experienced any positive investing experiences while investing in penny stocks? Share your story with us in the comments.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was originally published in 2009 and is regularly updated, most recently on Feb. 10, 2019. It is republished on the Hub with permission.
