Penny stocks certainly have their dangers, like the classic "pump and dump" scheme and phony shell companies built on scams. Just watch Wolf of Wall Street if you haven't already. But the most successful investors know that just a small investment in the right "penny" can be life changing.
We're talking about completing your retirement needs or building a more than healthy financial base, all from just a $1,000 investment.
The fact is, while penny stock investing can be risky, it can also be extremely lucrative. Some of the richest investors in the world made it buying stocks for pennies on the dollar and selling them for $10, $20, even $100 a share.
The key to investing in penny stocks is to fully understand the risks... avoid them at all costs... and then make the right moves so you can safely realize the big profits.
Before we show you one penny stock about to explode, let's cover some basics, like...
So-called penny stocks get their name from their low price. They typically trade for less than $5 a share. And many trade for true pennies, with share prices well under a dollar.
The SEC generally defines them as securities from small companies, most of which trade on the Over-The-Counter-Bulletin Board (OTCBB), Over-the Counter (OTC) and Pink Sheet markets. All have minimal listing requirements.
The fact that penny stocks aren't regulated (especially on the Pink Sheets) can be nerve-racking for some.
Savvy investors, though, understand that penny stocks aren't scary if you know what to look for. Furthermore, they realize that penny stocks provide the highest returns possible.
For example, investors who purchased $1,000 of Concur Technologies (Nasdaq: CNQR) at 31 cents on March 20, 2001 (3,225 shares) now have a stock that recently hit an all-time high of $114.32, and have turned that initial $1,000 investment into $368,682. That's a 36,768% gain.
Nevertheless, penny stocks typically have much fewer shareholders than a SEC-regulated stock, small market caps, and their success can be tied to a single event or decision.
Bottom line: While penny stocks are very volatile in the near term... (they can plunge just as fast and they can skyrocket)... it's the very same volatility that gives them such a hellacious upside - and makes them one of the best wealth-creating categories of stocks you'll find anywhere.
Penny stocks are plentiful - about 6,000 of them are available today. Trying to sort through all of them can be daunting. That's why we've created three "buckets" to help organize and categorize them.
Bucket 1: "Penny Diamonds"
These are micro-cap gems with high growth potential. For investors looking for a tiny, virtually unheard of company with a new technology, product, service or drug that's poised for a big breakthrough, micro-caps are the place to start.
As mentioned, companies that are involved in over-the-counter trading fall just outside of the many regulations that restrict the activities of the major stock exchanges.
That means they don't adhere to many of the time-consuming accounting and finance regulations of the SEC.
But to make traders more comfortable, Pink Sheets LLC recently created a new classification system to help investors assess the legitimacy of the companies in their roster.
The highest tier is called "PremierOX." Companies under this classification must sell for at least $1 a share, have at least 100 shareholders with a minimum of 100 shares each... AND meet the requirements of all the major exchanges.
The second level is called PrimeOX. There is no minimum share price here but companies must have at least 50 shareholders with a minimum of 100 shares to gain entry.
There are other classifications - including the legitimate OTCQX for international companies. The complete hierarchy can be found on the Pink Sheets website.
For the most part, when looking for those "Penny Diamonds" you should stick to the top two tiers.
Of course, finding the "next big thing" is not going to be easy. It won't just pop out and announce itself to you. That's why research is imperative. Do your homework. Here are some rules of thumb:
Once your homework is done, it's time to look for a catalyst. A catalyst can be any type of event, date, or unique situation that could create a spark that'll send your share price soaring.
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Here are two big catalysts to look for.
Ready For Market:
Many penny stock companies (particularly health related biotech's or innovative technology companies) spend years researching and developing products. This may include lengthy and rigorous testing. Pharmaceutical biotech products can spend years in trials and tests.
The catalyst occurs when the company is ready to go to market. Look for the end of trial dates... or actual roll-out dates. That means the company is ready to manufacture and sell its products and services. For biotechs, it also could mean a promising drug nearing FDA approval.
Buyout Candidates:
Many small companies are prime buy-out candidates. Typically these companies have a market niche, a technology, a promising drug, product (even patents) that a larger competitor desires. When one company buys another, they agree on a price. That price is often much higher than what the penny stock is currently trading at. This gives those shareholders an instant gain, and is the catalyst most at play in our favorite penny stock.
For a heads up on potential buyouts, follow Merger & Acquisition (M&A) trends to see which sectors are hot.
For example, record-breaking M&A activity is occurring in the pharmaceutical biotech sector right now.
That's because big drug makers risk losing $170 billion in annual sales when patents expire on their most lucrative drugs. So they're battling back, embarking on a multi-billion-dollar shopping spree, buying up small players who can replenish their pipelines.
Imagine if you buy a sensational penny stock biotech for under a dollar and the company gets bought up by Big Pharma. It's practically guaranteed that you'll see sizeable gains.
Bucket 2: Fallen Angels
Not all penny stocks are unknown companies traded over the counter. There are also companies that already have their fair share of recognition... perhaps even trading on the major exchanges... but whose stock is under $5.
These are "Fallen Angels." A Fallen Angel is a high-quality company whose stock price has declined due to market forces out of its control. For example, a company may lose market share due to business and economic cycles in its particular industry... a recession... or even a market crash. Some of these companies have very strong fundamentals, still trade on the major exchanges, and offer very substantial upside.
In short, a Fallen Angel gives you a tremendous value play, selling at significant discount to their intrinsic value and represent terrific bargains. At the end of this report, we'll tell you a current Fallen Angel with tremendous upside.
Bucket 3: Shell Companies
Pink sheets are often sprinkled with "shell" companies that exist on paper but have no assets. They simply exist for one purpose: To inflate the stock price and cash out. These are the penny stocks you need to avoid at all costs.
Many of these companies resort to tactics such as high-pressure telephone calls, email marketing schemes and phony promotion ploys that try to convince you their stock is about to go through the roof.
The truth is, most of these marketing schemes are run by professional promoters who make a good living spreading rumors about penny stocks.
Often these illegitimate companies could see their stock ramp up... then instantaneously drop 50, 60, even 100%.
The most common type of penny stock scheme is called the "Pump and Dump."
This scheme has been an investor pitfall to avoid in the penny stock world for a long time. A classic "Pump and Dump," works like this:
A holder of a big block of penny stock shares orchestrates a "whisper campaign" to pump up a penny stock company and its product. Traders rush in, driving the price skyward, enabling the perpetrator to "dump" their shares at a big profit. Those left "holding the bag" lose big time.
Here are some signs to watch out for:
You can avoid the common penny stock dangers pretty easily. Here are some safety tips.
First, remove the dollar signs in front of your eyes and replace them with company research. Start by looking for companies with financial track records, an important screen that eliminates 95% of the "shell" penny stock companies out there. Be a skeptic.
In other words, dig deep to make sure the company is sound and its business makes sense.
Once you decide on a company, you should "know" that company inside out. Know what it does... how it does it... how it makes money... and especially its management.
Second, apportion only a small amount of your overall portfolio to penny-stock investing. That means that you can't clutter your mind with a lot of "what if" long-shots - such as, "what if this stock soars...I'd be able to buy a vacation home or retire rich by 49."
That kind of financial sobriety sounds boring, but sobriety today means there's no hangover tomorrow.
Once you have thoroughly researched your stock of choice and purchased it through your broker or online, be prepared to treat it as a long-term investment.
These stocks are smaller companies that are not constantly watched by analysts and regulators. They can sometimes go days without even a single share changing hands. This will no doubt make some of the nail-biters out there anxious. But most intelligent investors find it liberating to be able to forego the short-term roller-coaster ride and focus on growth potential over the course of a company's natural life.
That doesn't mean ignore your investments altogether. Make sure you keep up with the information coming from the company and any third-party news stories - just like you would with an investment on a traditional exchange. But don't sell just because you don't see a change over a few hours or days.
Finally, don't get greedy. If you realize big gains on a stock at first, you could still end up losing money. You need to understand not only when to get in... but when to get out.
Now that we've covered the dangers, let's look at the last penny we recommended and the next penny about to take off.
The last penny stock we highlighted was Inovio Pharmecuticals Inc. (NYSE: INO) in the Private Briefing "This Penny Stock Will Cure the Flu."
Inovio is a Blue Bell, PA-based venture that's working on synthetic vaccines for cancers and for infectious diseases.
It's focusing on a "universal' flu vaccine - which is what we really need to avoid pandemic-like outbreaks. Right now, vaccine-makers try to develop inoculations that are unique to the current flu season.
That means they have to be developed, manufactured and distributed as quickly as possible. And if they "miss" and don't match the vaccine to the virus, or if a new strain of virus emerges, the vaccine isn't effective, and it's usually too late to develop a new one.
The obvious solution is to create an influenza vaccine that can protect us from existing and newly emergent "unmatched" strains of the virus. Lots of companies are trying to do this, and it's one of Inovio's key goals.
We first recommended Inovio last year when it was trading at 67 cents. Since then the stock has taken off, recently hitting 3.95 (prior to its recent 1:4 split). Following the split, INO now trades near $10. The stock has cooled off a bit lately, but with the tremendous upside Inovio has to offer, now is a good time for new investors to get in.
For a stock that's just starting to move and with just as much potential, look at Capstone Turbines Corp. (Nasdaq: CPST).
Founded in 1988, Capstone is the world's leading clean-technology manufacturer of micro-turbine energy. It has a daily trading volume of 3.5 million shares and a $440 million market cap. While not a household name, the company qualifies as a Fallen Angel, having an all-time high of $94.37.
The company develops, markets, and manufactures turbines that can be fueled by natural gas, diesel, propane or gasoline and they are used in various power generation products worldwide.
Capstone is primarily involved in cogeneration (using both electricity and heat), resource recovery (burning oil and gas production by-products), backup power supply, and remote power applications. Its micro-turbines are also used as battery charging generators for hybrid electric vehicle application.
The increasing demand for energy efficiency will accelerate the interest in Capstone's technology, and for 2014 the company expects to report positive annual earnings for the first time since going public in 2000. We've followed this company for a number of years, and now Wall Street is finally catching on. Capstone gained 60% in 2013, but it's still far from its all-time high of $94.37.
Analysts now have a consensus price target of $2.35 on Capstone, though estimates range as high as $4 - more than double its recent price.
Capstone and Inovio are two of the latest Private Briefing picks delivering big gains for our readers. Private Briefing members have seen returns of 648% on Celldex, 396% on NetQin, 391% on Pharmacyclics, and hundreds of other double and triple-digit gains.
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