How to Find The Best Stocks To Buy Now
Every time I look at micro-cap stocks, I realize that good things often come in small packages but you have to look at many small packages in order to find one good one. With more than 9,000 securities being traded knowing how to find the best penny stocks to buy now is difficult especially since the major research houses and wall street gurus do not often delve into the muddy waters of micro-cap stocks.
Micro-cap Companies and Index Reporting
While the Wall Street analysts overlook most penny stocks, many of the stocks that are traded on the Over-the-Counter Bulletin Board (OTCBB) or on the Nasdaq exchange, will be recognized as familiar names to many investors. These companies are identified by having less than $300 million in market capitalization. Micro-cap equities carry significantly higher risks than other stock classes but those stocks which the Russell Micro-Cap Index track have outperformed the Standard & Poor 500 and the Russell 2000 index for more than 5 years.
Fundamental Analysis of Penny Stocks
Searching for diamonds in this field is tough since there is little regular research available from the normal research channels. It requires time, effort, and a slightly different focus in order to develop your own intelligence on a micro-cap company. These stocks do not always trade at their full value, which creates opportunities for investors who know what they are looking for in a micro equity.
All the normal ratios and numbers are present. Things such as current price, price/earnings (PE) ratio, 52-week high/low ranges, and you can look at these to see if the normal valuations provide a glimpse of a winner. You will also look at the company’s balance sheet to see whether or not they have an inflow of cash or if the company is burning cash to stay alive. However, the reality is you will probably not find good numbers that you may be used to with other types of equities. Earnings will probably be negative and there will usually be negative numbers when it comes to shareholder equity. Although these negative numbers may be the early signs of a company that is experiencing extremely fast growth.
In order to make a good decision about most stocks you spend your time uncovering and analyzing historical performance. With penny stocks, you must turn the tables and spend most of your time looking forward for the company and its future holds. You have to understand the strategy that the business is undertaking; you must know that the management team is suited for the challenge and that the industry in which the company operates is a growing sector.
Many small companies find that the minute they file a financial statement, the statement is no longer valid. That is how rapidly these small companies change. However, all companies trading via the OTCBB are required to file statements with the SEC. Companies are provided some leeway on meeting the required filing dates but after repeated delinquent filings or extended periods of missed deadlines the company will be removed from active trading. Companies that consistently miss the filing deadlines or miss other auditing issues should not be considered as quality penny stocks.
Three Questions That Make a Difference
When doing analysis on a company in this arena, there are really only three important questions that you must have answers to in order to make a good decision. These questions are:
- Does the company have a product that is unique in the industry or is so compelling as to draw attention to it?
- Have they developed a process or improved a process that sets them apart?
- Regardless of economic cycles, will the company or its products be in demand for the near future?
Developing the skill to analyze penny stocks requires time and experience to learn. Individual investors often have a hard time coming up with original information in order to make quality decisions. That is where experience comes into play. Micro equities often start fast and burn out even faster. Often using a dedicated research service that is dedicated to working with the vagaries of these investments is a good investment. They often have the resources and industry specialization to make good decisions. ETFs (Exchange Traded Funds) are also a good alternative and often safer than individual stocks.