Navigating Penny Stocks Part 1

So you’re new to pennies, you’ve seen the rocket ship emojis and want to go along for the ride. You type your favorite ticker into Twitter and are immediately blasted with 50 tweets in five minutes of the same press release a company made 4 months ago. You come to realize pretty quickly that the pennies are an ocean of garbage filled with sharks and flat out criminals. 

But don’t be alarmed. As with any activity where money can be made, you are going to run into the worst of the worst. Lucky for you, there is always money to be made. Here are my tips to help you sift through the ocean of sharks and garbage that are the OTC. 

1. If a big story is all over Twitter, it’s too late. If a company drops huge news about some new oil deposit they bought the rights to, or they expanded their office space from one cubicle to two, the stock is almost certainly already overvalued. It’s done, move on, don’t get FOMO. Add the ticker to your watch list and watch it drop 50% in the next month. You need to invest in a company before stories break, not after. 

2. The SEC did you a favor, if they don’t report financials, avoid. If you’re new to the pennies you probably can’t, or don’t know how to, trade on the grey market. As of a few months ago, the SEC stopped brokers from providing real-time quotes if companies don’t report or “go dark”. So this should be dummy proof, but don’t even try it. These are 99% of the time complete scams setup by some Florida corporation. 

3. Get familiar with stock screeners and OTCMarkets and treat this like hobby reading. Pull up a screen on your favorite screener, like Yahoo Finance. Filter down by stock price to get the pennies, filter out some sectors you don’t want, and literally just read through each one in the screener. If anything looks remotely promising, immediately find their latest 10Q and 10k on OTCMarkets or SEC Edgar. You then need to just read. I’ll have many more posts in the future about how to read and what to look for, but for now, just read about the companies. Here is where you’ll start to find some actual value in the heap of garbage. 

4. Net revenue and gross profit. You’ll see some funny companies with wildly negative gross margins, like 100k in sales and 500k in COGS. Without getting into the accounting or basic economics, they are better off lighting their working capital on fire and declaring bankruptcy. If you don’t see a product that can produce a gross margin, close the 10k and move on. Find a company with a product that is actually selling and is profitable at a gross profit level. You’re taking a gamble here on future growth, if they can turn a gross profit, one day they can be fully profitable and cover their SG&A, Interest, etc. Only in rare circumstances do you break this rule. 

5. China. Don’t. If you think Alibaba is risky and the Chinese government may nationalize that one day, just think what would happen to a Chinese penny stock headquartered in Bermuda with 2 employees and a 1 million dollar market cap. 

I could go on for days with these tips…to be continued…


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