TOP 5 Metrics I use to Sniff for Penny Stock Winners... and one bonus metric!
Everyone has their little way or "system" to identify winners in the Penny Stock world... or maybe you're
developing one... in any case, below I share my "Staple Items" that I use for every situation I come across.
Finding small gains on penny stocks is as easy as reading a chart and watching for a breakout of a technical pattern, but if you are looking to find the next explosive penny stock that could skyrocket into the mid or large cap stock range, you have to pay attention to a bunch of different metrics to determine scientifically if this stock is prepared to explode.
Take heart readers... donít get carried away in anything anyone might refer to as a sure thing. It ain't so, as they say.
It will never happen without the science behind the assumption - then you can really determine for yourself what action to take, if any.
Real traders know that there is no such thing as a sure thing, so hedge against failure by diversifying your trades well enough that one trade will not seriously injure your account. If you put your life savings into a penny stock that ends up losing money, you're going to feel how you shouldíve felt from the very beginning of the ordeal: like a dumb ass. Hey I know - I have felt like a dumb ass many times.
While it is VERY exciting to know that Penny Stocks give us the opportunity to multiply our investments, donít ever put up the entire nest egg in one trade or you could most definitely end up losing it.
Hereís the metrics I always use to pick explosive penny stocks
Increasing Revenues and Earnings
Companies that are publicly traded typically release an earnings report every quarter to illustrate their financial performance. Keep track of this on any stock you believe has the power to transform in value and look for a trend of increasing revenues and better earnings for the company. This means the company is growing, even if the stock is not yet going up.
Decreasing Debt to Equity Ratio
Companies that are preparing to break out of a shell and transform into a wealthy multi-billion dollar conglomerate are typically very good at handling and reducing debt. A company that can quickly and easily pay out its debts and start building equity in the markets has a very bright outlook for the future and should attract value investors from around the world.
The company you are looking at should have a competitive advantage in the markets. A particularly promising way to insure this might be to look for a company that has a niche in the market no other company is effectively filling. This usually can be translated into some form of technology no other company has refined or a style of business no other companies are mastering.
Technical Pattern of Congestion
Typically before a penny stock breaks out of a previous resistance level, the stock undergoes a pattern of congestion where we see price action compression, often taking the form of a pennant or flag. Watch for these technical patterns and buy when the time is right by waiting for the breakout to confirm.
Take a look at the overall market and find what the most promising industries for growth based stocks are. If the sectors with the current highest levels of growth are the same as the sector in which your penny stock is located, itís a good indication that this stock has potential.
BONUS - Price/Earnings Ratio - the standard "No Brainer" indicator.
A company with good earnings is a company that does good business, but if a company does good earnings and is under priced, you are looking at a great opportunity to buy! A low price to earnings ratio at or below 15 can mean that no one else is aware of just how valuable this stock is, which makes it a perfect buy for a value trader.