The Problem with Penny Stocks

5 Penny Stocks to Buy that Nobody is Watching

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Penny stocks have the potential to make you rich, if you can find them before anyone else

If you’ve ever jumped into a hot stock only to watch the price drop from under you, you know how important it is to be early. That’s the problem with most penny stocks, once everyone knows about the company, it’s too late to do anything but lose your money.

In this video, I’ll show you how to find the penny stocks that nobody is watching. I’ll then reveal five penny stocks to watch that could double your money or more.

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Why Your Penny Stocks Suck!

Nation, there is no doubt that penny stocks offer the best opportunity for returns. These small company stocks can surge higher for 100%-plus returns like the trillion-dollar companies just can’t do.

But the problem is most investors are just chasing the crowd when it comes to investing in penny stocks. I’ve seen a lot of investors on Robinhood and even in our own Facebook group, Let’s Talk Money Together, they’re just chasing the smallest companies with the lowest share prices.

And the problem here is that most of the returns are already sucked out of these stocks by the time you get to the shares.

Case-in-point, shares of Nikola, ticker NKLA were the hottest in the market early June when the stock price hit $77 per share but at that point, investors were already flooding into the shares. You see here, the green line is the number of Robinhood investors holding the shares and the magenta is the share price. Over 136,000 investors held the shares on Robinhood alone and there was just no surprise left in the stock.

The Problem with Penny Stocks
The Problem with Penny Stocks

Those shares have lost over half their value in two months because there’s no buyers left. When everyone is watching a stock, sellers have all the power.

Nobody was watching Netflix in 2010 when it had just 12 million subscribers and the stock traded at $7 per share…that’s why it went on to be the best investment of the decade for a 4,000% return to 2020.

Another example, Nobody was talking about a billion-dollar cloud services company called Fastly when I recommended it last March at $11 a share but with the rest of the market catching on, the shares have shot up over 700% since.

It’s not enough to find a great penny stock to buy, you have to find it before the rest of the market.

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How to Find the Best Penny Stocks to Buy

And that’s the trick, right? FINRA estimates that six-in-ten households hold stocks in the U.S. alone. That’s 77 million investors and doesn’t even count the professional analysts pouring over penny stocks, trying to find the next cash machine. How do you find something nobody else has found?

That’s what I’m going to show you in this video. I’ll first walk you through a quick screener to find penny stocks, the fundamentals I look for in an investment. Then I’ll reveal how to narrow that list to the undiscovered penny stocks to buy, the ones with the most potential. I’ll then reveal the five penny stocks to watch that could be your best returns of the year.

Penny Stock Screener

To start, I’ll usually use a simple screen in the Webull app to narrow my list of penny stocks. I can click through to Markets in the menu, then access the stock screener and you can save screens here for easy access in the future.

The first thing I do is narrow the market cap, that’s the company’s market value of shares, to less than $100 million which gives us the very smallest companies. Technically, small cap stocks can go all the way up to $1.5 billion in market cap but anything over a few hundred million is going to have a lot of analyst attention already.

I’ll then go into Volume here, and this is the average number of shares traded on a daily basis, so a great measure of market interest in the stock. We’re trying to find companies that the market isn’t wild over just yet so we’ll narrow this to less than 100,000 shares traded.

I’ll also use this ROA ratio, that’s return on assets, for one last factor on company performance. Here I’m not trying to kick out too many companies but I do want to focus on those with a positive return on assets.

As you’re using the screener, you can see it updates below with the number of stocks that meet the criteria. You can also use some of these technical indicators or some of the other fundamentals, just to narrow the list a little so you don’t have as much research to do.

Besides the stock screener, I really like the Webull app for its other features like the stock simulator that gives you a million dollars to test out your ideas in paper trading. I’ll leave a link below, check it out and you’ll get two free shares of stock worth up to $1,400 when you make your first deposit.

Other Factors to Look for in Penny Stock Investments

Once I’ve narrowed the list of penny stocks down to maybe a hundred or so, I’ll go online to Morningstar or some other data service to find those with consistently increasing revenue and to check out the rest of the company’s financials. I’ll check the balance sheet strength as well as that all important operating margin. Here I’m just looking for a definable competitive advantage either in the company’s operating performance or in its product.

That should leave you with a short-list of the top penny stocks but not necessarily the stocks you want to buy. Remember, it’s not enough to find great companies. You need to find them before anyone else.

Why Invest in Penny Stocks

In the past, penny stocks have only been available to a select group of elite investors. But with its recent popularity and increased coverage by the media, anyone can now take advantage of the substantial profits that these stocks can offer.

It's nice investing in penny stocks because of the chance to make huge profits. With penny stocks, you don't have to pour in your entire savings or manage a large portfolio. This can be attractive to new investors who are looking to find the right niche for their investment style.

If you are interested in investing in penny stocks, it's best if you use an online broker with low commissions and good customer support because these will help reduce your overall costs and increase your profit potentials.

Penny stock trading has always been dominated by day traders that look at short term gains rather than long term investments (don't get confused with longer holding period). Their approach consists of buying stocks at lower prices hoping for a quick gain after which they would sell the stock. The reason why people don't invest in penny stocks is because of its volatility and risks involved with it. Although you have a higher possibility of really big gains, there's also a much higher probability that you will lose lots of money as well. If you're looking for long term investments then you should avoid penny stocks.

If you want to invest but still not sure what type of investor are you be wise enough to know yourself first before making any decision about it. It doesn't mean that investing in penny stocks isn't for everyone – I'm just saying that if you don't take the time to determine who YOU are as an investor, your chances of success are extremely slim.

How to Find Undiscovered Penny Stocks

So for that, we’re going to check three sources to find the undiscovered penny stocks. We’ll first go to Yahoo Finance or most online investing sites will show you this, and you’re looking for the number of analyst ratings on the stock. We’ll use ObsEva, ticker OBSV, as an example and we can go here to the Analysis tab and it’s going to show us that the shares are already covered by seven analysts. That’s not a lot, shares of Apple are covered by more than three dozen analysts, but it’s still some pretty heavy market attention.

Next, we’ll go to Robintrack which is a really useful resource for seeing what Robinhood investors are buying and where that market sentiment is going. Robintrack ranks the stocks available on Robinhood by the number of investors holding those shares, so we see here that just over 3,000 Robinhood investors hold the shares making ObsEva the 1,408th most popular stock on the platform.

Now obviously that’s not hugely popular but, especially with the big spike last November, where the shares added more than 2,000 investors holding, this penny stock doesn’t seem like it’s going to be one of our undiscovered gems.

Finally here, we can go back to Yahoo Finance or any platform and I want to look at the volume of shares traded over the last six months or so. Here I’m looking for big spikes where the market has already seen something to get excited about and here we see in early July, the shares saw a big spike in volume, up to ten-times the normal daily volume.

So this is going to mean some research on your part but it’s the only way you can be sure that the penny stocks you buy haven’t already had their day. Finding these undiscovered stocks means you’re much more likely to book those huge returns when the market finally sees what you do in the company.

Risks to Penny Stock Investing

Now before we get to those five penny stocks I’m watching, there are three risks, three warnings that you absolutely have to know when looking at these.

First is that low-volume stocks, so those with fewer investors buying or selling shares each day, they’re going to have higher bid-ask spreads. That’s the difference in price between buyers and sellers in the market. It’s not usually an issue because there are so many investors in a stock like Apple or Tesla that the spread is less than a penny but in some of these penny stocks, it can be several cents a share. That means if you just put in a market order when you buy the shares, you could be losing out on a few cents immediately which can be a percent or two on these stocks.

So here you need to look at that bid-ask spread and should consider using a limit order when you buy. This is where you tell the platform you only want to buy at a certain price so you don’t have to worry about that spread.

Another risk to penny stock investors is these are extremely susceptible to pump-and-dump scams. That’s when you get a group of investors hyping up a stock, trying to get as many buyers in it as possible to push up the price, then they sell out of their shares and let it drop back down…and it always does because the price is no longer propped up by that manipulation.

Any stock with a price under a few bucks a share and under twenty- or thirty-thousand shares traded on a daily basis is an easy target for these because the boiler rooms, the scammers, can easily go in and manipulate the price with just a few hundred thousand dollars and it doesn’t take much to push the price higher.

There’s not much you can do about this except be on the lookout for if it hits your stock. A good clue is if the shares start surging with no legitimate information or news directly from the company.

This next warning is just to stay away from the pink sheet stocks. Those are the stocks traded on what’s called the over-the-counter market or OTC rather than on the Nasdaq or the NYSE. The problem here is these OTC stocks have none of the reporting requirements or regulation you get on the other markets, so it’s just so much harder to know if a company is legit or not.

There are thousands of penny stocks traded on the Nasdaq and other legit markets, you don’t need to chase them on the pink sheets.

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Five Penny Stocks I'm Buying Now

OK, so a long lead-in to these five penny stocks to watch but I want you to know how to find your own stocks to buy, to be able to make your own decision. Using this though, I’ve found five undiscovered penny stocks with strong upside potential and with hardly anyone following them. I’ll be putting all five into my Webull paper portfolio to track before I invest.

The first penny stock I’m buying is Ramaco Resources, ticker METC, a $96 million metallurgical coal miner with assets in the United States.

Coal hasn’t quite had the comeback many were waiting for but it’s still a needed resource for metal manufacturing and other industries. Ramaco is trading for an enterprise value of just 0.50-times revenue, which means a buyer could come in and get it for half the value of its annual sales. It’s a profitable company, which is pretty rare among penny stocks and has a solid balance sheet. The company has $15 million in balance sheet cash and just $25 million in debt.

Daily trading volume averaged just over 100,000 in the last month but has settled to under 50,000 shares a day lately. Just 735 Robinhood investors hold the stock, ranked 3,185 on the platform and only four analysts cover it for earnings estimates.

Next here is $25 million Interpace Biosciences, ticker IDXG, a diagnostics lab for analysis and treatment of cancers and targeted therapeutics.

Biotech is THE industry this year and while most of the money is going into COVID diagnostics and trials, there’s going to be a lot that flows into other programs as well. No part of the biotech market is as popular, profitable and necessary as oncology so any company that can carve a niche for itself in that is going to be a winner.

This is another one with a solid balance sheet, which is so critical when looking at these penny stocks. You want to make sure the company has the cash reserves on its balance sheet and not too much debt so it can survive and have the flexibility in any market. Interpace has more than $13 million in cash, so more than half its stock market value is in cash, against just $4 million in debt.

Just under 2,000 Robinhood investors own the shares which puts it ranked number 1,938 on the platform which is a little more popular but still not widely held. Just four analysts have earnings estimates for the stock, so lots of room for surprises there.

Motus GI Holdings, ticker MOTS, is a $35 million medical technology company in endoscopy procedures.

The company is focused on development and sale of its Pure-Vu System for early detection and prevention of colorectal cancer. Excluding skin cancers, colorectal cancer is the third most common diagnosed in the U.S. with more than 50,000 Americans dying from it each year.

Revenue isn’t spectacular on this one but it has been increasing to $110,000 last year from just $40,000 the year before. It’s also got $21 million in balance sheet cash against just $9 million in debt, so definitely that flexibility we’re looking for.

895 Robinhood investors own the stock making it the 2,940th most popular on the platform…or not widely held at all I guess would be a better way to say it. Just six analysts cover the shares and earnings estimates are all over the place so plenty of surprise potential in this one.

$73 million Velocity Financial, ticker VEL, is a real estate lender for investors in 1-to-4 unit rentals and small commercial properties.

The company operates mainly in New York, California and Florida which are likely to see a rise in loan defaults but probably not as bad as everyone thinks. It’s a profitable company and the spread between the business’ cost of capital and loan rates should support revenue.

This one is also the most undiscovered of the group with just 354 Robinhood investors holding the shares, putting it at number 4,178 on the platform. Only four analysts offer earnings estimates but even the low estimate is for profits with revenue expected around $63 million for the year.

Probably the riskiest of the five penny stocks is $130 million PlayAGS, ticker AGS, a supplier of electronic gaming devices like slot machines and table games.

Now that’s obviously not a great market when most casinos are shutdown but the company also has a mobile apps segment that is helping to support sales. Still though, AGS has over $500 million in long-term debt against just $43 million in balance sheet cash. It’s expected to book $143 million in sales this year, about half its 2019 revenue, but then to bounce back to $233 million in 2021 sales. Shares are off the 52-week high by 80% so if this one can pull through, it’s got a lot of upside to go.

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More than 4,500 investors hold the shares on Robinhood, making it one of the more popular on our list, and ranked number 1,076 on the platform for number of investor accounts. Seven analysts are covering the shares though I still think there’s some room for surprise and upside return on it.

Remember, penny stocks are extremely risky and stock prices are likely to jump or plunge 10% at a time. These seven small cap companies are all solid businesses that can be great investments but you have to give them time. Penny stocks don't become the next Apple in a year but give it five or ten years and you'll have a few that will make you rich.

Read the Entire Penny Stocks to Buy Series

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