Penny stocks in 2017 have been very profitable for investors, with some gains reaching over 1,000%. But some of these companies can be risky investments if you don't conduct proper research. That's why today we're going to show you one investing tip that will let you easily determine which penny stocks to avoid…
Investors are attracted to penny stocks because they offer explosive gains. AVEO Pharmaceuticals Inc. (Nasdaq: AVEO), for instance, has been one of the top-performing penny stocks of the year, rising from $0.54 per share to $3.03. That means investors have seen a 461.1% return over that time – crushing both the Dow Jones and the S&P 500's 10.1% and 8.6% respective returns.
But penny stocks can drop just as quickly as they went up. Despite being up on the year, AVEO stock took a 25.7% dive in just over a week from July 10 to July 18.
This is what makes penny stock investing tricky – investors can see a stock like AVEO posting triple-digit gains and decide to buy in, only to lose 25.7% of their investment in eight days.
The volatility is one of the reasons why Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends never putting more than 2% of your portfolio in penny stocks.
But that's not our only tip – here's another one of the most important penny stock investing tips to use this year…
Profit from Penny Stocks in 2017 with This Easy Tip
The best way to figure out if certain penny stocks are safe for your portfolio is to check out the company's most recent annual 10-K filings.
10-K filings are financial documents submitted to the U.S. Securities and Exchange Commission (SEC) on an annual basis, and they cover every aspect of a company's finances. The most important sections include annual revenue, earnings, and outstanding shares. Think of it as a company's yearly report card available to the public for investors to see if the company is performing well.
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For penny stock research, one of the key sections you need to look at is "Executive Compensation," often located under part III of the filing. It shows exactly how the company's top executives, including its CEO, are paid each year.
When the executives are paid in stock options, it means they are not receiving their payouts all at once. It indicates they have faith in the long-term performance of the company. Options incentivize executives to stay long-term and contribute toward the company's profitability, which ultimately makes the options more valuable.
But executive compensation in all cash is a red flag for investors. That's because cash compensation does not incentivize executives to work toward stronger long-term performance. It makes no difference to their compensation if the firm does well or poorly.
A good rule of thumb to remember is to invest in companies with executives who are invested themselves.
Despite their importance to penny stock research, these 10-K documents are up to 100 pages long. Reading through these filings can be time-consuming for investors, and the technical jargon can make them difficult to decipher.
But Money Morning Small-Cap Specialist Sid Riggs has you covered when it comes to finding the best stocks for your portfolio. He does the research for you. Today, he's recommending one set to soar thanks to the exploding auto market in China.
Chinese auto sales have been on the rise in recent years, climbing 45% between 2013 and 2016. That rate of growth smashed U.S. and EU sales, which only increased 12.45% and 22.9% over that period, respectively.
Although shares of this company cost more than the typical $5 penny stock cutoff, Sid only picks companies with strong growth potential. His recent small-cap stock pick has climbed 43.9% since he first recommended it to Money Morning readers on April 19.
Here's Sid's pick for the best small-cap stock to own right now…