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hall9999 (99.57)

I proved Floridabuilder wrong.

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June 16, 2009 – Comments (8) | RELATED TICKERS: CNU

  About 18 months ago Floridabuilder wrote a blog titled, "...Caps Doesn't Work For Penny Stocks".  In that blog he basically made three separate claims:

1) In a random selection of penny stocks (he went with stocks ratable in CAPS but under $2.50) 75% will see their stock price drop significantly, 25% will have notable market beating gains, and none will be a multibagger.

2) CAPS rating system will not help you find good penny stocks.

3) The odds of finding a good penny stock are so low that it's not even worth the trouble. (25% vs 49% for any other group of stock).

   To prove his claims FB picked 64 random penny stocks and red-thumbed them with the expectation that after one year they would net 75% accuracy and a bunch of points.

  The first two are fairly reasonable conclusions and I think the evidence pretty much bears them out.  However I took exception with point #3.  While it is true that there is a significantly disproportionate amount of trash in penny stock land it is fairly easy to weed out the bulk of them.  With what's left your odds would be 49% just like with any other group of stock.  To prove my claim I took FB's 64 random picks, did just a couple minutes of research on each, and quickly whittled it down to the best 16.

  Here's where it stands after 18 months.  Since small-caps tend to do poorly in a recession it's no surprise that a lot of these stocks are down a lot.  However, while FB's picks as a groupare down about 64% my picks are down 46%... still worse than the S&P's 37% decline over the same period, but not by much.  And while 24% of his picks outperformed the maket 44% of mine outperformed.  What's more, once I had things whittled down I did some more research on my group and ended up picking one for my CAPS portfolio - CNU.  Lo and behold, that one has done the best out of my 16.

  So there you have it.  Will very little extra effort, your odds of finding a good penny stock pick can be just as good as any other stock. 

8 Comments – Post Your Own

#1) On June 16, 2009 at 6:07 PM, JakilaTheHun (99.93) wrote:

I think it's worth noting that one of my biggest gainers of the past six months had become a "penny stock" by those definitions.  I was recommending North American Palladium (PAL) as one of the best buys of the year at $1.  It had a run-up all the way to the $2.60+ range, but I believe it's retreated a slight bit.  Unfortunately, I couldn't green thumb on CAPS at $1 --- I had to wait till it hit $1.50. 

It's silly to suggest that one can not discern between penny stocks.  PAL has virtually no debt, very valuable assets, operates in a highly cyclical industry, palladium was in extreme oversupply at the time with the automakers dumping their stocks of it to increase cash (a move that will bite them in the future), and Pd is a very rare metal that has very unique qualitites that can be used in a variety of applications.  To me, that signaled "strong buy". 

Obviously, there are many penny stocks that are junk, but I think it's a bit foolish to automatically dismiss any stock trading under a certain price level as "junk".  It depends on the circumstances of the individual company. 

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#2) On June 16, 2009 at 6:09 PM, dexion10 (29.63) wrote:

penny stocks are not worth the risk - maybe in a bear market they have better relative value since the avg stock loses money anyway - but the average penny stock loses money over a bull market so given the risk of owning a ZERO penny stocks are just not worth the effort or the money most of the time

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#3) On June 16, 2009 at 7:09 PM, chk999 (100.00) wrote:

I think hall9999 has made a very good point with this. Low priced stocks are an area where stockpicking skill can add value. Because they are thinly followed, you  aren't competing with a dozen pro analysts. Yes, many of these companies are garbage, but if you have time and skill, you can find some real nuggets.

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#4) On June 16, 2009 at 10:05 PM, russiangambit (99.18) wrote:

> Yes, many of these companies are garbage, but if you have time and skill, you can find some real nuggets.

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The issue is that many of these companies are outright frauds, and most others are just one step above them, where they are not outright frauds but there is so much deception, it is amazing. I have 2 favorites in that category which I followed for a time - NTIC and VVUS, but there are thousands of them. I beleive EI specializes in shorting this kind of stocks.

 

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#5) On June 16, 2009 at 10:21 PM, Philyogy (84.94) wrote:

Well I must say I value FB's thoughts on alot of things, but I also must admit, that thanks to Caps, and the Fool, I've been able to find many +penny stocks....

 Two examples- htm +97.18% .. pds+64.15%

 

Just some of the finds I've come across from reading Caps and Fool...

Caps gives me a place to see other people's thoughts and insites on the particular company.. If I like the buy pitch I hear from people, I then check thru fellow caps players I follow, and see if they, also have a green or red light..

Thanks to Fool, I'm learning more of the inner workings of the market.. Fool give my mind a broad perspective of many things.. Caps narrows the picks.. 

 

And not necessarly a penny stock, but the stock promoted as the only energy stock to own in 2009.. This is the one I signed up for Fool with... +69.49% .

 

 umm. safe to say. I do have share in each, in my real life portfolio.. :)

 

 Thanks CAPS... and of course.. Thanks Motley Fool...

 

 Phil 

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#6) On June 17, 2009 at 4:52 AM, checklist34 (99.92) wrote:

here's some

AXL = much better than a 10 bagger in 3 months, don't know where it is today, haven't been in it for a hwile

CNO = much better than a 10 bagger in 3 months, I'm currently a bagholder watching it go down, lol.  It'll be back

ACAS = 8 bagger from bottom to recent top

MCGC = 4 bagger from THE DAY THEY CURED THEIR COVENANT DEFAULT to now, on their way to an 8 bagger

BAC almost meets this category

LVS, MGM, even BYD i think make this cateogry.  minimum 2 out of 3, probably all 3, survive and go 10 bags from their lows.  BYD may not 10 bag, but a surviving MGM and/or LVS have a probability of 10 bagging.

in this market, penny stocks have been where its at.  pilgrims pride (never bought into it) is almost a 50 bagger from its low.  in 8 months.

several stocks IN BANKRUPTCY are 5-10 baggers, see my recent blog in which i bewilderdly discuss this phenomenon

FEED is a multibagger from this category

Some decent ot good oilfield companies went down 90+% to join this category.

CEP, my new favorite long from the 3's, makes this category and will multibag

in the big dive to the march lows, and MUCH MORE SO in january when the S&P was similar to now, risk has been almost viciously mispriced in this market . I'd say today risk is about fairly priced, but it has been very very mispriced to the downside.  Which created a situation wher efor a while buying a risky penny stock with some legitimacy basically ensured a multibagger once the market settled down a bit.  And so it has happened.  :)

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#7) On June 17, 2009 at 12:55 PM, chk999 (100.00) wrote:

russiangambit - I said a lot of the penny stocks were garbage. But the frauds look pretty obvious to me (My Rich Uncle - MRU being a prime example) and can be dismissed out of hand. For the rest, suspicion and distrust are your friends. But it is the fact that these stocks are thinly followed that allows for incorrect pricing. So some patient sifting may yield outsize profits. 

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#8) On June 17, 2009 at 1:18 PM, russiangambit (99.18) wrote:

> russiangambit - I said a lot of the penny stocks were garbage. But the frauds look pretty obvious to me (My Rich Uncle - MRU being a prime example) and can be dismissed out of hand. For the rest, suspicion and distrust are your friends. But it is the fact that these stocks are thinly followed that allows for incorrect pricing. So some patient sifting may yield outsize profits. 

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I completely agree. But I still find them very risky. One large short seller can drive the stock down 20-30% easily because of low volume. And you never know whether it is justified or not because there is so little information available on them. Many of them are pump-and-dumps where, where it is the other way - pumping drives them way up (  often up to 500% up)  and then they collapse. They are multi-baggers at some point, if you know when to exit.

The only way to trade penny stocks is on momentum, not on fundamentals.

I traded LVS at some point, and also ACAS and BAC and C because they were  too oversold. But these are not what I would consider classic penny stocks. Penny stock is usually something that is not even included in Russell.

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