Archives
Blog : Bargain Hunters Make Bullish Penny Stock
July 30th, 2010
The current recession has taught penny stock investors many things. Or I presume it has. I haven’t spoken to every, or even most, penny stock investors. However, one thing that sticks out is that the old “large cap stocks are safer than penny stocks” axiom simply doesn’t hold water.
The fact is penny stocks have outperformed their large cap peers for the past decade and, as they usually do, have been leading the economy out of the current recession. In fact, some analysts are calling 2000-2010 the "lost decade," because the S&P showed an average loss of -1% per year.
It hasn’t been a lost decade for penny stocks though. The Russell 2000 Index of small-cap stocks had an annualized average gain of 3% per year over the same period. Granted, 3% gains are small potatoes, and for most penny stock investors, unacceptable returns, but it does illustrate how penny stocks regularly buck the trend…and tend to get overlooked.
"What has been amazing to me, looking back at this whole period, is that even when the market has gotten hit, small caps have held up pretty well," said one senior market strategist at ING Investment Management in New York City.
Adding, "Typically in the bank channel, you have a lot of investors who don't even own small caps. So my advice to financial advisors at banks is: If your clients don't have small caps in their portfolios, they should."
With some analysts predicting a double dip recession, there is another reason why penny stock shy investors should take more than a glancing pass at quality penny stocks. When recessions end, penny stocks are (generally) the first to rebound.
"Small cap stocks do outperform large caps, especially at the start of a recovery," said one analyst. "Typically, they get beaten up in a recession, when credit gets tight and large firms have more access to capital. Then, when you have a recovery, small caps will rise earlier and by more than large caps."
Why? During the recession the weakest penny stock companies have been (justifiably) culled, leaving the stronger firms standing tall. Penny stock companies also have relatively low fixed costs compared with revenues and earnings. They are also more nimble and can adapt to competitive threats and opportunities, and introduce new products more quickly.
While the long-term outlook for penny stocks remains positive, in the short-term, the markets seem to be taking a breather. Consumer discretionary stocks lost ground earlier this week as consumer confidence fell to its lowest level since February.
Discretionary stocks are those companies that deal with products or services that are not necessities. These industries include automobiles, high-end clothing, restaurants, hotels, and luxury goods.
That said, the U.S. economy needs Americans to spend money. After all, close to 70% of the nation’s Gross Domestic Product is derived from everyday purchases like dining out, buying a new shirt, or jewelry.
While American’s still need to shop they have been eschewing traditional stores in favor of discount stores. Over the last two years debt conscious consumers have helped a number of small cap stocks climb significantly higher.
Discount variety store 99¢ Only Stores (NDN – NYSE) has seen its share price rise close to 215% over the last two years, climbing to $18.10. Small town variety store king Duckwall-ALCO Stores, Inc. (DUCK – Nasdaq) has seen its bottom line thrive during the recession. Over the last two years the company’s share price has climbed 135%.
Tuesday Morning Corp. (TUES – Nasdaq) is a penny stock that sells discontinued merchandise from name-brand manufacturers at steep discounts. Surging after strong back to back quarters, TUES’s share price slipped on weaker than expected third quarter results. That said, the company recently forecasted fiscal fourth-quarter earnings above Wall Street's expectations on stronger customer traffic and sales growth.
Jewelry designer LJ International Inc. (JADE – OTCBB) has been enjoying the recession. In October 2008, JADE was trading for as low as $0.35, in October 2009, it hit a high of $3.98. A profitable, financially strong company with growing revenues, and strong market penetration, JADE is currently trading around $2.75.
The company also announced recently that it introduced its new jewelry line at one of the world's most important shows in the jewelry industry. To date, JADE has already booked over $7 million in orders from U.S. customers from the event.
What does the rest of the year hold? “Earnings are going to surprise again to the upside, and I think we’re starting to see the semblance of that already,” said one chief investment strategist. “Longer- term trajectory, the U.S. economy is improving -- period. Coming out of these types of malaises, typically and historically you’ve seen the market really catch fire.”
And excellent penny stocks are going to be the kindling in the burning bush.