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Blog : Bucking The Penny Stock Trend
by John Whitefoot on April 25th, 2008
Give or take a fiscal quarter, it’s been almost a year since the subprime woes of last summer rolled across international markets. At the time every banking CEO and financial pundit with an opinion was reminding us that the credit crisis would only impact a small number of the population and if you had lots of money, it would be easy to get credit.
Our optimism was, seemingly, short lived. The credit crisis has led to more than $200 billion in write-downs taken by banks and financial firms; far more than even winsome Ben Stein had expected.
It seems though that these same short sighted CEO’s are sounding the trumpets call - the worst is behind us and we have scaled the rainbow.
Earlier this week outgoing UBS AG Chairman Marcel Ospel said the worst is over for subprime problems at Switzerland’s largest bank, and “will soon be sailing into calmer waters.”
An Associated Press article I was reading astutely pointed out that bank CEOs missed the mark in “forecasting the destructive path of today's credit crisis.” Perhaps that’s why we ought to listen to today’s sunny proclamations with a critical ear.
Over the past few weeks some of the banking industry’s most highly paid employees have been waxing eloquence on the markets rosy future. JPMorgan Chase's Jamie Dimon thinks the subprime mess is "maybe 75 percent to 80 percent over." Goldman Sachs' Lloyd Blankfein said "we're closer to the end than the beginning," and Lehman Brothers CEO Richard Fuld, said the worst is "behind us."
And really, can you blame the Magic 8-Ball CEO’s for touting their stocks? It is quarterly results season after all. If you can’t spark up sentiment and support for your lilting stock…what else can you do - besides cashing your annual bonus?
You could perhaps be more pensive…or reflective, say like Merrill Lynch CEO John Thain, who told the Financial Times, "I hope those who say we are at the end are correct. I am somewhat more skeptical."
IF we are at the beginning of the end, where does that leave penny stock investors? As per usual, you can find opinions straddling both sides. One investment manager noted recently that the stage is set for small caps to lead the recovery over the next 12 months.
“Small caps tend to do well in an economic recovery,” and that the groundwork is already in place.
In particular, the analyst was, not surprisingly, bullish on natural resource stocks, noting that both materials and energy stocks will be among the strongest performers in the equity market this year.
While most investors will be looking at gold plays, he suggests looking at base metals like molybdenum and iron ore. Molybdenum is used to strengthen steel and prevent corrosion, he says, and this metal is doing well "because one of the biggest users is the energy industry."
And there are a number of excellent base metal penny stocks that fit the bill perfectly. For example, Baffinland Iron Mines Corp, (BIM), and Sultan Minerals Inc. (SUL), both trading in Canada on the TSX.
Penny stock and small cap nay sayers on the other hand note that the credit crunch has raised the cost of capital for companies. This can be tougher for those penny stocks that do not have the deep cash reserves of their larger rivals.
Until the clouds part and the subprime rubble really is behind us, for penny stock investors, this means you have to make your small-cap choices with extra caution - if you want to buck the prevailing trend.