How Can I Tell Whether a “Hot Penny Stock” is Actually Worth Buying?

By: Namrata Shah

North American micro-cap investors have access to thousands of penny stock opportunities, each competing for your attention – and dollars. But of these, only a small fraction will ever deliver the lucrative short-term returns that make investing in penny stocks so attractive. It’s critical that you do solid research and careful due-diligence before risking your hard earned capital.

The financial media and the major Wall Street analysts rarely cover micro-cap companies. As a result, investors may need to do more original research and get information from other sources. These might include the target company itself, or firms such as OTCMarketBulls which specialize in analyzing penny stock opportunities.

The information you use to assess the investment value of a micro-cap company will often be quite different than that you would use to examine a large, blue-chip corporation. For stocks listed on the major exchanges, an investor will typically use financial and stock price information to determine whether a stock is worth buying. You might look at 52 week stock price highs and lows, profits, debts and other markers.

However, relying on financial and stock price information alone to assess micro-cap investments can be very misleading. The best penny stock investments are small, growing companies which likely haven’t yet seen a lot of trading activity. With heavy investment in start-up, research and development or marketing, these companies are likely showing small or negative earnings and may have high debt-to-equity ratios. And for small, rapidly growing companies, financial statements get out of date very quickly.

While you should never completely ignore the numbers, smart penny stock investors focus most of their attention on the non-financial information. In other words, they look at the company’s strategy and business model to determine whether or not a stock has the potential for high short-term growth. Some of the things you should consider include:

Company Offering: Closely examine the products or services offered by the company and compare them with other key competitors. Look for products or services that serve a large niche market while differentiating from the competition through lower pricing, better technology, a unique approach, etc.

Customers: Who is the company’s target market? Look for a large base of potential customers with the resources and interest in purchasing the products or services being offered.

Distribution Channels: Look for companies with a clear, concrete strategy for delivering their product or service to their target market.

Marketing Strategy: Pay close attention to a company’s marketing and public relations activities. Are they effectively reaching their target audience? Also look at the company’s investor relations and stock promotion efforts as these can affect share prices.

Management Team: Get to know the company’s leadership. Look for relevant experience, past success and an enthusiastic vision for short and long-term growth.

OTCMarketBulls uses these and other measures to select stocks to watch for our newsletter (click here to subscribe). While no research can fully eliminate your risk, proper due diligence can greatly increase your chances of picking a winner for your portfolio.

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