Now that we're past that decent "Santa Claus" rally - optimism for the holiday season - we're coming to the start of something called the "January Effect." The Dow gained a hefty 3.8% for the month of December, and we expect those gains to keep piling up as the new year begins.
This will kick-start our best penny stock to watch this week, but it's not the biggest catalyst heading into 2020. Today, we're going to show you that penny stock and what could send its price ripping higher through the year.
For starters, the January Effect is the belief that stocks tend to go higher in the month of January than any other month. There are many different arguments for why this happens.
Some say it's a buyback wave following a late December sell-off to offset taxes on capital gains. Others argue that everyone's investing their Christmas bonuses in the market.
Whether it's one or the other - or a combination of the two - is not important. What matters is that the statistics favor the major market indexes going up in the month of January.
The Dow added a whopping 10% in January 2019. This was the highest monthly gain of the year. And January was also the biggest month for stocks in 2018, with stocks popping more than 7%. In fact, January was one of the best-performing months for stocks in at least five of the last 10 years.
Even more important, however, is that small stocks seem to perform the best during this time. The top penny stocks are particularly susceptible to market movements because of their low share price. Small gains in price can translate to huge percentage growth.
Of course, it's not without risk. The losses can be equally huge with the wrong penny stock. So investors should be mindful of the underlying financials of every investment.
This can prove difficult since there are thousands of penny stocks out there. Fortunately, we have the Money Morning Stock VQScore™ system to help us find the best ones. The VQScore uses a proprietary algorithm to scan the underlying financials of thousands of stocks. It then scores those stocks from 0 to 4.9 based on their profit potential.
Stocks above 4 are considered to be in the "Buy Zone." To decide on our top penny stocks of the week, we simply look at the stocks scoring 4 or higher, then we select the ones trading under $5 a share.
One of our best penny stocks today has a perfect 4.9 VQScore. And the "January Effect" is just the beginning of what's in store for our top penny stock today. Here's what could turn the best penny stock this week into the best penny stock of the year...
A Catalyst for the Best Penny Stock in the New Year
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The January Effect will be a mere kick-start for Denbury Resources Inc. (NYSE: DNR) this year.
America's oil production has increased by around 4.2 million barrels per day since 2016. And U.S. oil drilling will continue to expand going into 2020.
Denbury conducts oil and gas exploration and production in both the Rocky Mountain and Gulf Coast areas. Right now, this company manages 260 million barrels of oil and natural gas reserves. So, if oil prices rise this year, the stock will shoot up.
This company is closing the fiscal year on track to meet its goal of $140 million to $150 million in free cash flow. This is money that can go into expanding operations - for example, the CO2 pipeline coming in 2020.
Detractors might point to Denbury's long-term debt of $2.5 billion as a problem. But now that the company is profitable, it's paying its debt down fast. Net income has gone from $163 million to $374 million in the last two years - growth of 129%. Denbury was able to pay $280 million toward the debt last year. And since profits are rising, it's only a matter of time before it's paid off.
But here's why the stock price could still soar in 2020.
Last year, oil started at $45 per barrel. But 2019 was a year of OPEC production cuts, Iran sanctions, and logistics challenges in the United States. All of these forces, along with progressive U.S. drilling, combined to drive oil prices up to $60 today.
Supply restrictions - and the rising oil prices from that - could still pump Denbury stock in 2020. Right now, analysts give it a 43% growth target for the year, from today's $1.39 to $2. This is a reasonable projection as the company expands its exploration and production around the United States.
But as international tensions linger between the U.S. and OPEC countries, it's possible a restricted supply of oil could provide additional wind for DNR stock.
This potential is also reflected in Denbury's perfect 4.9 VQScore.
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