How to Create a List of Penny Stocks to Watch for Huge Returns
Hey Bow Tie Nation, Joseph Hogue here with Let’s Talk Money and back with one of the most highly-requested topics from you in the community. Nation, there is no better investment for triple-digit returns than penny stocks. I’ll share the two reasons why this is but all you have to do is look at runaway names like Netflix to make the case.
Netflix opened in 2002 as a $500 million company, just 18 years ago. A $120 investment back then would be worth $45,600 today! For what it cost you to buy a toaster oven in 2002, you could turn that into a 2020 Mercedes C-Class with all the upgrades!
And it’s not just getting in on the next big thing. Shares of Sirius XM traded for just $0.10 per share in 2009, 15 years after its IPO, before rebounding to $5.60 each for a 5,600% return. Imagine turning just five-hundred bucks into twenty-eight grand?
In this video, I’ll show you how to create a list of penny stocks to follow, how to start looking for those investments that will potentially turn $100 into thousands. Then I’ll show you how to narrow the list to a few with the best potential and reveal three penny stocks I’m following right now. We’re talking creating a penny stock list today on Let’s Talk Money!
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What are Penny Stocks?
Now, I want to get in a quick definition of penny stocks because there are a lot of misconceptions. Penny stocks aren’t just stocks trading for under $1 or even under $5 a share. The real definition revolves around the total company value, it’s market capitalization. That’s the number of shares times the stock price and you can find it on any stock quote.
So a penny stock is generally any company with a market cap of $500 million or less. I’ve seen even companies with a market cap under a billion dollars be called penny stocks but it’s usually the lower amount.
Penny stocks are also generally less liquid, meaning there aren’t as many shares traded on a daily basis. Now that means they’re usually flying under the radar of most Wall Street analysts and can be a huge advantage for Main Street investors.
Why You Should Invest in Penny Stocks
And that’s really one of the two reasons I love investing in penny stocks. Obviously you’ve got the potential for market-busting returns. You’re never going to get a 38,000% return on shares of Apple like you did on Netflix. For that to happen, the $1.4 trillion Apple corporation would have to become a $532 trillion company…which is six-times the size of the entire global economy!
So for those 10-bagger returns, it makes much more sense to look for the undiscovered companies that can grow from $100 million into a billion-dollar business than expecting one of those large cap giants to do the same.
The second reason though, and this one isn’t talked about as much, but the very fact that penny stocks aren’t well covered by Wall Street or its analysts is a huge plus for regular investors.
There are 36 professional analysts covering shares of Apple. That’s three-dozen investors that have made stock analysis their life’s work. And we’re not talking a couple hours watching a stock. I worked 60-hour weeks as an analyst, reading every word of company 10-K reports, creating cash flow models based off the financials, it is an intense job!
That all means that very little comes as a surprise when it comes to analyzing those big companies. Through 2019, analysts were off by an average of just 4% when it came to predicting earnings for the mega-cap companies. That surprise percentage tripled to 12% though with the small-cap stocks.
These penny stock companies just aren’t analyzed to the extent of other stocks. That means, if you’re willing to take the time to look into these names, you can uncover more opportunities and make that higher return.
Building a Penny Stocks List to Follow
Before we get to those penny stocks I’m buying, three stocks I think could at least double over the next year, I want to show you how to create your own penny stock list. Those of you in the nation know I’m not about to just drop a few stock tips and call it a day. I want to help make you a better investor, show you how to find these stocks yourself.
So I’m going to start with a simple stock screener like the one in the Webull app here. You can screen for stocks of companies under a certain size or share price in the Webull app and create a screener that continuously looks for these stocks. I started with companies under one billion dollars market cap, so that definition of small cap or penny stocks.
You can also use some of these technical indicators which screen for momentum and other patterns in a stock so I’ll use one of the relative strength signals and see which stocks meet the screen.
For this basic screen, I’ll usually set it for companies under a billion market cap. I’ll also set it for a positive return on assets, that’s the ROA criteria and a positive return on equity, the ROE criteria in the app.
So here I’m looking for small companies that are generating positive returns on their assets and investor equity. That tells me management is effectively using those assets and rewarding shareholders.
While I’m looking for longer-term penny stocks in this one, I’ll sometimes include this technical factor, the RSI or relative strength indicator as well. This just measures the recent movement in a stock to estimate if it’s oversold or overbought compared to recent trading.
Adding a short-term indicator like this can be a good idea if you want to find stocks for quick rebound potential as well as that longer-term play.
Narrow Down Your List of Penny Stocks
Once you’ve got a list of stocks that meet these basic fundamentals and maybe some of those technical signals, it’s time to dig into the financials a little and this is where the real money is made. Anyone can watch CNBC for half an hour and come away with some stock picks. Getting those triple-digit returns though means sitting down and taking the time to find the undiscovered values.
And here I’m primarily looking for four factors in the financials. First I want to find companies that have grown their sales over at least two or three consecutive years. Even if the company isn’t profitable yet, it’s at least getting closer with this positive sales trend.
I also want to see a consistently higher operating margin. That operating margin, or the operating income divided by the sales on the income statement, that trend is hugely important especially for these small, fast-growing companies. You see, most penny stock companies, they’re growing sales so fast, they’re sacrificing efficiency for growth in this stage. Sales are growing but they’re also spending so much on marketing or more staff that the operating margin or that profitability is decreasing. But if you can find a company that is growing sales AND becoming more profitable while it’s doing that, you’ve got the potential to see earnings explode.
I also want to watch for runaway debt for these companies because a lot of these, they’ll get loose with the spending and start using lots of debt instead of keeping things lean. Management rationalizes that it’s ok to borrow because the company is growing so quickly but it’s just a noose that slowly tightens over the company. So I’m looking for companies that are able to produce that sales growth, do it efficiently and stay lean without blowing out their debt-to-equity ratio.
Finally, I just take a quick look at the stock chart, and this isn’t anything scientific but I don’t want to invest in a company that’s been around for decades and never did anything. You see these all the time, companies trading in that penny stock space for decades and never seem to make it into the big time.
How to Buy Penny Stocks
Now once you’ve found some penny stocks you want to follow, you can either buy the shares or use this paper portfolio feature in Webull to follow the stock for a while. The app gives you a million-dollars to test out different strategies and stocks before you make a real trade.
So you go into the app and you see I’ve already been testing a few stocks with simulated trades. If I go into a stock and click paper trading, it takes me to this page to buy the shares. Then it’s just like a normal trade where you put in an order to buy the number of shares you want. I can follow the stocks in my paper portfolio just as if it were real money.
3 Best Penny Stocks for 2x Returns
Now I want to reveal those three penny stocks I’m watching, three stocks I think could post 2x-returns or more over the next year. I already own one of these and will be putting the other two in my paper portfolio on Webull to follow before investing.
First here is $69 million Zovio, ticker ZVO, trading around $2.16 per share.
Zovio is a leader in the education tech space which, frankly I’m surprised hasn’t completely blown up on how important this has become during the lockdown. Traditional schooling has completely shut down and a lot of districts are questioning if schools are going to open in the fall.
Zovio partners with colleges and universities to deliver online and connected solutions to the traditional way of education. We’re talking online testing, faculty management, software that is going to be in high demand over the next year.
Sales have been weak over the last year but the balance sheet is screaming buy to me here. The company has $63 million in cash and no long-term debt…with a market cap of just $69 million!
We’re talking 93% of the market value of the company is backed by cash! That’s unheard of and a huge margin of safety for investors.
Next on our penny stock list, and this is one I own, is Groupon, ticker GRPN.
This is one I highlighted a few months ago when I started building my position. I’ve not got about 12,000 shares at an average cost basis of $1.15 per share.
Now Groupon has been tough and will probably take the better part of this year to do anything but there are a few things I really like about the stock.
This is a leader in ecommerce with one-in-five U.S. internet users visiting the site each month. It’s got a unique app and a huge amount of brand recognition, and the clear leader in the $1 trillion local bargains market.
But going back to one of the key themes I’m looking for in penny stocks here, that survivability to get through a few bad months, we look at Groupon’s balance sheet and see an extremely strong cash position.
Groupon has $750 million in cash against non-current liabilities of just $370 million, so a net cash position of $380 million here. Now take that against the market value of $604 million…nearly two-thirds of the share value is backed by cash!
Will second and third-quarter results be bad for Groupon, you can bet on it. But that $750 million cash in the bank means it survives for when consumers come back and drive these shares higher. I like the shares up to at least $2 each and think it can go to $3 per share over the longer-run.
Our third penny stock here is Quantum Corporation, ticker QMCO, a $133 million provider of video storage and data management.
Nation, the future of the internet is video and we’re about to see data storage and management needs explode with 5G, autonomous vehicles and the internet of things. All that video and streamed data needs to be stored somewhere with the capacity to deliver it back from the cloud or hardware instantly. That’s where Quantum comes in and I think sales start following this trend higher.
Now the balance sheet isn’t as strong here with $8 million in cash against about $150 million of long-term debt but operating income turned positive this last year and the financials should start looking better. This company is plugged into one of the biggest long-term trends we’re going to see and I think it can be a great long-term hold.
Investing in penny stocks isn't about just switching on the TV for a few good ideas. These are high-risk investments and you need to take your time with the analysis. Create your penny stocks list to watch and invest in only the best that meet your criteria.