From Pink Sheet to Blue Chip
Revisiting the Reputation of Penny Stocks
Penny stocks, pink sheets, microcaps — whatever you want to call them — generally put a sour taste in investors' mouths.
It doesn't help that Scorsese's 2013 production Wolf of Wall Street depicted Jordan Belfort as a crack-smoking, money-hungry maniac who used penny stocks to swindle average Joe investors out of their middle-class incomes.
It also doesn't help that a good amount of penny stocks are barely real companies. I know you've heard of these notorious "pump-and-dump" schemes — hopefully not because you've fallen victim to one.
Unfortunately for all the legitimate companies on the OTC markets, penny stocks have developed a pretty nasty reputation. Those pump and dumps schemes are making the entire market look bad — kind of like that obnoxious friend you regret bringing to the party.
Even worse, most of the people who trade penny stocks are losing money. Penny stocks really can't catch a break...
But here's the thing: Most of those investors can't blame their losses on shady CEOs, pump and dumps, or the Jordan Belforts of the world...
It's time to take responsibility for your actions, people.
If you were swindled by an evil penny stock con artist, that's pretty unfortunate. But throwing your money into a company that you haven't researched is the same as entering your credit card number, Social Security number (SSN), or bank account information into a questionable Nigerian website.
Honestly, I don't feel that bad for you.
Those investors who failed big time on the OTC? They didn't do their research. They invested for the wrong reasons or at the wrong time and probably in the wrong companies.
There's no secret recipe for picking stocks, especially penny stocks. But there are definite red flags that tell you which stocks not to pick.
On the flipside, there are a solid number of penny stocks that — because of legitimate financial growth, talented CEOs, or a really good idea — are no longer penny stocks. That's the whole point of this game, right?
"Most of the greatest stocks started small." — Peter Leeds
If you're even thinking about getting involved in microcap trading, there are a few essential basics you should know. It comes down to two words: due diligence.
If you can't handle the volatility, head for the door. Penny stocks, even with a significant amount of research, are only for those investors who don't mind risk — and I mean rapid gains or losses in a matter of hours.
Because some penny stocks don't trade on a stock exchange, there is generally less information available. That means they're not always required to report financial earnings or historical data.
These are also low-volume stocks, meaning there's a chance you'll have some difficulty selling your shares in the future.
Again, do your own research. Enter at your own risk, and develop a reliable method for picking stocks.
Despite all the daunting omens that surround penny stocks, there have been success stories.
Take Monster Beverage (NASDAQ: MNST), for example.
Twenty years ago, shares of Monster, which at the time was called Hansen's Natural, hovered around $0.69. Now, the company trades on the Nasdaq with a market capitalization of almost $33.39 billion, and share prices are around $60.
Some analysts consider MNST one of the best-performing stocks of all time:
"After adjusting for the several share splits that MNST has taken over the years, investors in MNST during the lean years would be sitting on 100,600% gains."
— Timothy Sykes
True Religion (NASDAQ: TRLG), a designer clothing brand known for its denim products, actually started out as a Vancouver-based scam. Frankly, I think selling a pair of jeans for $200 is still a scam.
Apparently, these overpriced pants caught on.
Now, True Religion apparel is popular, and the company is a legitimate success. In less than a decade, share prices jumped from $0.65 to $32.
The company was acquired by a private equity firm in 2014 for more than $835 million.
But penny stock success stories aren't isolated to the "sexy" industries like energy drinks and high-end fashion.
Medifast (NYSE: MED) is another example, though a little less flashy. Over the course of 13 years, the diet and weight management company went from share prices of $0.14 to a market cap of almost $2.3 billion and share prices hovering around $190 — a return of more than 135,000%:
Just a few years ago, Forbes ranked Medifast as the "leading small business in America."
BJ's Restaurants (NASDAQ: BJRI) is one of my personal favorite stories, so I saved it for last.
It didn't start as a scam, and the product isn't "groundbreaking" by any means.
The restaurant started in Orange County, California, in the late 1970s and slowly expanded, with more locations in San Diego and Los Angeles. Since then, the company has absorbed a few breweries and casual eating spots
There's no miracle story here, folks. Other than the 2008 recession, this is a story of slow but steady growth. It's not volatile or flashy. It's not selling pizza for $200 per slice:
Even so, BJ's Restaurants started off trading for less than $2. Now, the company has a market cap of more than $1.5 billion and shares run around $71.
But these penny stock successes that we've talked about are not the norm.
Let me emphasize this...
More people lose money trading penny stocks than those who turn profits.
But another point of emphasis is this...
If you scrutinize which stocks you pick (and this goes for all types of stocks), if you do your due diligence, and if you root out the bad seeds and potential scams, penny stocks can prove to be a pretty lucrative game.
For goodness' sake, everyone, look for the signs. Be smart with your money.
Hopefully, you finished reading this and now have a more positive idea about penny stocks. They're not all evil. And like we mentioned before, all great things start small.
Until next time,
Pro Trader Today