The penny stock sector is a great place to make market-beating returns on inexpensive stocks. But it’s crucial to learn our two penny stock investing tips before adding these stocks to your portfolio.
You see, penny stocks attract investors because they can give you double or even triple-digit gains in a matter of weeks. For example, MoSys Inc. (Nasdaq: MOSY) – a California-based semiconductor company – has soared 198.5% from $0.66 on June 1 to $1.97 today (Thursday, June 22).
But many penny stocks can see tremendous triple-digit returns without the financials to support them. A recent example is Hongli Clean Energies Technology Corp. (Nasdaq: CETC), a Chinese energy company whose shares surged 144% from $1.90 to $4.63 in just the first week of April.
However, the stock’s trading was halted after that, and the firm is now undergoing a class-action lawsuit for misleading its investors. According to info from the Nasdaq exchange, Hongli allegedly provided false financial info to investors, a charge that could cause the stock to be delisted and possibly result in CETC investors losing their capital.
Companies like Hongli are the perfect example of why you need to be careful with penny stocks. According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, they should never make up more than 2% of your total portfolio. Even then, investors need to decide if they can handle any exposure at all to these typically volatile investments.
That’s why we’re here to give you two tips for finding the best penny stocks to buy. Then, we’ll give you one of Money Morning Small-Cap Investing Specialist Sid Rigg’s top small-cap stock picks this year.
Penny Stock Investing Tip No. 1: Review Executive Compensation
It’s important to know the financial information of any stock you want to add to your portfolio. Penny stocks are no different.
It can be harder, though, to find financial information on penny stocks. The reason is that many trade on the over-the-counter (OTC) exchanges or the pink sheets. The requirements for financial reporting on these exchanges are much less rigorous than those on either the New York Stock Exchange (NYSE) or the Nasdaq.
However, all exchanges require companies to submit annual 10-K filings. These are the key to finding out whether or not a penny stock is safe for your money because they provide one important piece of information: executive compensation structure.
When looking at a company, knowing if its upper-level executives are paid in cash or stock options is extremely important. If they’re being paid in stock options, it indicates that they have faith in the firm’s performance and intend to stick around for the long haul.
If they are being paid in cash, it’s a major cause for concern. Choosing to be compensated in cash rather than options shows these managers do not have faith in the company’s long-term performance. It also indicates they may just be trying to cash in on the firm before it ultimately files for bankruptcy.
This all boils down to one simple rule: Don’t put your faith – and hard-earned money – in a company if its employees don’t put theirs in it.
Penny Stock Investing Tip No. 2: Know the Signs of a Pump and Dump
One of the most common types of penny stock scams is the “pump and dump.”
In this scenario, salespeople aggressively promote the stock in various ways. These can include cold-calling random people, mailing out informative pamphlets, and sending spam emails. All of these forms of communication hype a particular company as a great investment opportunity.
The purpose of this promotion — the “pump” — is not to let investors in on a golden egg. It’s to get investors interested enough to the point where they buy shares of the company and the stock price starts to rise. A climbing stock price is the whole point of the scam.
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Once the stock price has risen enough, executives and early investors who already own the stock are going to sell shares to get a profit based on the promotion-fueled rally. This massive sale of shares by insiders is the “dump,” and it allows them to make a huge profit while leaving the duped investors with big losses from the plunging stock price.
The best way to avoid falling victim to one of these schemes is to never buy a stock that’s being aggressively promoted to you. Don’t rely on the word of a salesperson, no matter how tempting the story might be.
While there are plenty of safe penny stocks out there, avoiding getting ripped off requires you to do an extensive amount of research. Sid Riggs understands that this is a lot of work, which is why he's done the legwork for you and provided a small-cap company that's one of his favorite investments of the year.
Even though shares of this stock are above the $5 cutoff for penny stock classification, it's worth a look as analysts predict it could gain as much as 25.7% over the next year.
Here's Sid's newest small-cap recommendation…
Buy This Small-Cap Stock for a 25.7% Profit in 12 Months
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Our small-cap tech recommendation today is Mitek Systems Inc. (Nasdaq: MITK).
The San Diego-based firm is known for its sophisticated identity verification software. Its services let users make mobile banking transactions like insurance payments and check deposits. These include Mobile Docs, which is used for scanning financial documents, and Mobile Verify, which can be used for validating driver's licenses.
Mitek boasts a huge presence in the growing mobile transaction market, which is projected to expand by up to 716% through 2021. According to Statista, total revenue for the tech companies making those transactions possible could be over $865 billion by 2021.
Mitek's continued dominance will not only come from its mobile banking business, but also from its identity services.
“The company is already the world leader in mobile capture and identity verification, so it has a huge first-mover advantage over its competition,” Sid said. “It's no surprise, then, that its top line nearly doubled over the last two years.”
In fact, Mitek's earnings history shows how its profits are soaring at a rapid rate. The company's net income has staged a massive turnaround in recent years, going from a $5.3 million loss in 2014 to a $1.9 million profit in 2016. Mitek raked in income of $1.2 million last quarter alone – up a stunning 109% from Q1 2016.
Even more attractive is Mitek's projected earnings growth. Five analysts surveyed by Yahoo Finance expect the firm to post on average 2017 earnings per share (EPS) of $0.29. That's more than quadruple the 2016 EPS of $0.06.
Those same analysts predict MITK will rise as high as $11 per share by June 2018. That would represent a strong return of 25.7% from the current $8.75 price for investors who buy in now.
With a strong foot in the mobile transaction sector and surging earnings, Mitek is one of the best small-cap tech stocks to invest in for stable returns in 2017.
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