Link to the video: 5 Signs a Penny Stock is Worth Millions
We all know that Penny stocks are volatile and risky and especially susceptible to price manipulation. But there are those rare penny stocks that can greatly reward us risk-taking investors. If you bought shares of Monster Beverage Corporation, ticker MNST, in 1996 when it was trading at $.04 a share, you would be a happy investor today: Monster is now trading above $89 in December, 2021! If you had invested $1000 in 1996, your 25,000 shares would now be worth over 2 million dollars!
It takes some serious time and effort to hunt down, and analyze a penny stock that has the potential for Monster’s type of gains, but a potential 2-million-dollar gain show it’s worth it!
Here is a quick example from my own portfolio In November 2018, I bought 1000 shares of Novavax, ticker NVAX, at $2.45 per share. The stock’s current value is now $166.56 per share, and a current value of this investment would be $166,566, a 164-thousand-dollar gain in three years!
This is Lynn and welcome back! So, let’s go and dive into analyzing penny stocks, but first if you could give this video a thumbs up to let me know you’d like to see more videos like this one, I’d greatly appreciate it!
- Penny stocks trading under $5 per share, are usually priced that low for a solid reason. The stock could be for a once-thriving company now on the brink of bankruptcy or failed a major exchange’s’ requirements, had to de-list and is now trading as an over-the-counter OTC. Or it could be a new company, with little market history, not yet meeting the criteria to be listed on a major exchange. Penny OTC stocks are much riskier than listed stocks, due to lower financial reporting requirements. You should remember that a lot of sneaky, underhanded financial tactics can be involved when the do report financial results. Penny stocks can also fail, resulting in the complete loss of an investment.
But, there are those exciting penny stocks though can eventually provide big profits. So today we are going to cover the 5 Signs that a Penny Stock could someday be worth millions!
Number 1: Check the penny stock’s fundamentals. This requires conducting a thorough due diligence before making an investment, and not relying only on the information provided by a YouTuber, for example. At first glance, Walter Energy Co that had traded as high as $143.76 a share in 2011, and then dropped to $0.16 might have looked like a great deal. But the stock’s investors got burned when the company soon declared bankruptcy.
Walter was an established company in metallurgical coal aging sector with cyclical demand and political pressures. World leaders’ commitments to lower greenhouse emissions placed more downward pressures on Walter Energy. Plus,, a worldwide coal supply glut and slowing demand from China drove Walter to sell its assets to two companies in 2016.
On the other hand there is an investment like mine in November 2018, when I bought 1000 shares of NVAX at $2.45 per share that two years later would have realized, a 164-thousand-dollar gain!
Inovio was a speculative biotechnology play with strong partnerships due to its vaccines portfolio, potential buyout and merger potential. As of 2021, a buyout hadn’t happened, but the stock originally came to my attention when the Bill and Melinda Gates foundation awarded NVAX an $89 million grant for their RSV vaccine! Now that’s a strong partnering supporter!
When researching penny stocks, you need to weigh any potential gains versus the company’s fundamental including its debt, cash flow, partnerships and buyout potential. Fundamental balance sheet analysis is also very important. Prior to purchasing a stock, an investor needs to dive into the company’s financial statements to determine the financial health. For example, growing debt burden along with a declining cash position can be a sign of over borrowing. This is especially dangerous in an environment like today with rising interest rates looming. More expensive loans can quickly drive a young company into bankruptcy. Also look for a company with strong net income growth, but avoid those with a downward slide in their cash balance, which can be a red flag of earnings manipulation.
You need to have a complete picture as to why the stock’s trading at its current price before considering a purchase. To understand in detail what to look for in a company’s fundamentals, you’ll want to view my video on ticker CODX, and I’ll provide a link at the end of this video.
Just like with any stock purchase, when considering buying penny stocks, fundamental analysis and a solid understanding of the company’s management can help lead you to the winners and lesson the losers.
Now let’s go onto the 2nd Key Criteria for Penny stocks: Industry Life-Cycle Analysis
When analyzing a company’s balance sheet, a penny stock investor should also do an industry life-cycle analysis. Some penny stock companies are in sectors still in a “pioneering phase.” This early phase is flooded with a large number of small-sized competitors in the same space, with novel products and concepts, plus lower customer demand for the products. This particularly applies to the tech or biotech stocks, which have high costs and little revenue to show for it. These companies will usually trade at very low prices due to the speculative nature of their stock. Buying a stock during this “pioneering phase” can mean you’ll have to wait a long time before realizing a positive return on your investment.
The next phase is the “growth phase,” in which many of these companies gain greater market attention that can cause their sales and demand to skyrocket.
An example of industry life-style analysis was the boom in social media during the early 2000s due to the success of Myspace, that surpassed Google as the most visited place on the internet in 2006. Facebook, now Meta, founded in 2004, was also gaining traction and was considered the second most popular social media site. Then Myspace was acquired by Rupert Murdoch’s Newscorp. Ltd for $580 million in 2005.
But that valuation turned out to be exceedingly high after Facebook overtook MySpace. Then MySpace eventually petered into insignificance after Facebook began dominating social media.
The third Criteria for Analyzing a Penny stock is to: Check Penny Stock Industries
Industries that offer binary outcomes or “make or break” speculative plays contain a large amount of penny stocks. Investors can look for these stocks in biotech or resource sectors. A resource sector is an industry which uses natural resources as its raw materials from the ground.
The Canadian TSX Venture Exchange included many resource-based penny stocks that took off during the commodity boom of the 2000s. But then the party ended when the stocks crashed back to nothing, similar to how technology stocks crashed in 2000s.
Traders can still take advantage of binary-type companies when conditions are good and commodities are booming. But always realize that these stocks can fall just as quickly as they rise.
Our 4th Criteria in Analyzing a Penny stock is: Seek Great Management
For penny stocks, it’s all about “management, management, management.” And, I can’t stress this enough. Solid management can turn around a struggling business and launch a startup to staggering heights. Most important, experienced and ethical management that have a good amount of share ownership in the company can enhance investor security.
We rarely find superstar managers working for penny stock companies, but they can be found. For example, Concur Technologies, bounced back from its post-tech bubble price of $0.31 then got bought out in 2014 at $129 per share. This remarkable comeback was driven by the strong vested interest of President and COO Rajeev Singh. Singh, co-founded Concur in 1993, acted in a wide variety of management roles over the years, then finally stepped down after Concur’s acquisition by software giant SAP.
As investors, we also need to look for a proper system of corporate governance that adheres to principles of integrity and transparent disclosures will mitigate the risks of fraudulent behavior. Furthermore, a valid system of checks and balances whereby independent third parties assess the integrity of corporate financial statements and monitor management’s behavior is correlated with positive long-term stock returns. These guidelines are usually outlined on the company’s investors relations site.
For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom
We also dive into the quality of the company’s management because if a company fails to satisfy employees, suppliers and customers, the stock price will eventually drop, big.
NVAX was a great example here with their excellent Employee Stock Purchase Plan The ESPP allows employees to purchase shares of common stock at 85% of the market price. This is a great incentive and creation of employee loyalty!
SAS CEO Jim Goodnight has been in charge for all 40 years SAS has been in business, and always emphasized employee benefits. SAS then was in the top 50 for 13 straight years in “100 Best Companies to Work for. In 2008 SAS stated, “If you treat employees as if they make a difference to the company, they will make a difference to the company.” Goodnight’s philosophy was that satisfied employees create satisfied customers.”
As an investor also sees company’s that are focused on customer satisfaction. It’s very revealing that Forrester Research’s annual Customer Experience Index ranks the best and worst in customer service. Companies in the top 10 have routinely outperformed the S&P 500!
A company’s management is also a custodian of the public shares, authorized share count and potential share buy backs that can increase the shareholder’s value.
In looking at Monster out earlier example with a potential of a $2 Million dollar profit, an important note is that in looking at Monster’s security details, in 1997, the company had then a share value for its common stock of $.005. There were only 30 million shares authorized; and only 9 million shares issued. This is key as with a smaller amount of shares issues and authorized, the stock price can easily be driven up on good news like increased earnings. This also exhibits great management and decision to not dilute shareholder’s stock value by flooding the market with millions or billions of shares. Many of the OTC stocks today have billions of shares authorized, and many billions of shares in their float, making it difficult to move the stock. These companies have little income, so sell shares to bring more operating cash. This creates a downward pressure on shareholder’s stock value.
IN 2018, NVAX had only 600 million shares authorized, with 383 million shares issued. What’s really impressive is that NVAX’ revenues enabled the company to buy-back company shares, putting 455 thousand treasure shares on the books. This lowers the shares issues and increases the stock’s value for a shareholders – the sign of a mature management team!