Penny stock and small cap stock investors may want to get off the sidelines and into the game about right now, if the market has indeed made the bottom many experts think it has. Why? Because the early part of bull markets tend to favor these smaller companies, and by extension tend to reward forward-thinking stock speculators.
But has the market actually hit bottom? Yes, we think it has. We're not naive to the lingering challenges the economy is facing. But, when the market's average P/E gets close to single-digit levels, it's historically been at or near a major bottom.
The argument against a market bottom already being made are rising unemployment, an economic retraction, and plenty of net losses from major corporations. All are valid arguments, but none of those symptoms have been permanent in the past. Successful investors simply recognize different stages of the market's cycle, and get in or out of stocks when appropriate.
But just how precise does an investor's re-entry need to be? There's the rub - nobody really knows when the exact bottom has been made until after the fact, but nobody can really afford to not be in the market at the exact bottom.
On average, owning stocks from the exact market bottom to a point twelve months later translates into a gain of more than 32%. Waiting a mere three months to step into the same bull market whittles an investors' gain down to less than 15%.
More important to small cap stock traders, the earliest part of new economic expansions are generally better small and micro cap stocks. After 1990's recession, for instance, the Russell 2000 Small Cap Index was up nearly 44% in 1991. After 2002's recession, the small cap index rallied more than 45% in 2003. For comparison, the S&P 500 only gained 26% in both 1991 and 2003.
The point is, small cap stocks (and by extension, penny stocks) are your best opportunities when the market makes its turn for the better. Ironically, that's also the point in time when very few investors are interested in any stocks at all.
Now fast forward to today. Though 2008 was basically a disaster, the exposure of all those problems coupled with a new regime in Washington may well mean the worst is over. In fact, several small and micro cap stocks are already behaving like the market is in the impending bullish phase.
Take BioTime Inc. (OTC:BTIM) for instance. Despite no net profits, this biotech stock managed to gain more than 300% in calendar 2008. The basis for all the buying is the promise of profits in the distant future, though the foundation is being laid now. In other words, it's perceived as undervalued relative to the opportunity.
Basic Earth Science Systems Inc. (OTC:BSIC) is another bulletin board company that may have been unduly beaten up in 2008. Shares fell from a high of $3.04 in mid-2008 to a low of 51 cents by November. The company has remained very profitable though, which may be the reason for the stock's rebound to as much as $1.00 in January ... almost a 100% gain.
CVR Energy Inc. (NYSE:CVI), despite being listed on a major exchange, is still one of those small cap stocks that may have actually benefited from its size during the contraction. This oil refiner swung to a profit during 2008, and has continued to widen its margins. Shares gained 136% between late October and late January.
The message is simple - the stock market's implosion has highlighted the best of the best stocks. A lot of them appear to be small and micro cap penny stocks, including a big batch of bulletin board equities. And as you can now see, picking the right penny stocks at the right time can translate into superior returns. An investor's job is simply to go out there and find them.
But has the market actually hit bottom? Yes, we think it has. We're not naive to the lingering challenges the economy is facing. But, when the market's average P/E gets close to single-digit levels, it's historically been at or near a major bottom.
The argument against a market bottom already being made are rising unemployment, an economic retraction, and plenty of net losses from major corporations. All are valid arguments, but none of those symptoms have been permanent in the past. Successful investors simply recognize different stages of the market's cycle, and get in or out of stocks when appropriate.
But just how precise does an investor's re-entry need to be? There's the rub - nobody really knows when the exact bottom has been made until after the fact, but nobody can really afford to not be in the market at the exact bottom.
On average, owning stocks from the exact market bottom to a point twelve months later translates into a gain of more than 32%. Waiting a mere three months to step into the same bull market whittles an investors' gain down to less than 15%.
More important to small cap stock traders, the earliest part of new economic expansions are generally better small and micro cap stocks. After 1990's recession, for instance, the Russell 2000 Small Cap Index was up nearly 44% in 1991. After 2002's recession, the small cap index rallied more than 45% in 2003. For comparison, the S&P 500 only gained 26% in both 1991 and 2003.
The point is, small cap stocks (and by extension, penny stocks) are your best opportunities when the market makes its turn for the better. Ironically, that's also the point in time when very few investors are interested in any stocks at all.
Now fast forward to today. Though 2008 was basically a disaster, the exposure of all those problems coupled with a new regime in Washington may well mean the worst is over. In fact, several small and micro cap stocks are already behaving like the market is in the impending bullish phase.
Take BioTime Inc. (OTC:BTIM) for instance. Despite no net profits, this biotech stock managed to gain more than 300% in calendar 2008. The basis for all the buying is the promise of profits in the distant future, though the foundation is being laid now. In other words, it's perceived as undervalued relative to the opportunity.
Basic Earth Science Systems Inc. (OTC:BSIC) is another bulletin board company that may have been unduly beaten up in 2008. Shares fell from a high of $3.04 in mid-2008 to a low of 51 cents by November. The company has remained very profitable though, which may be the reason for the stock's rebound to as much as $1.00 in January ... almost a 100% gain.
CVR Energy Inc. (NYSE:CVI), despite being listed on a major exchange, is still one of those small cap stocks that may have actually benefited from its size during the contraction. This oil refiner swung to a profit during 2008, and has continued to widen its margins. Shares gained 136% between late October and late January.
The message is simple - the stock market's implosion has highlighted the best of the best stocks. A lot of them appear to be small and micro cap penny stocks, including a big batch of bulletin board equities. And as you can now see, picking the right penny stocks at the right time can translate into superior returns. An investor's job is simply to go out there and find them.
About the Author:
John Monroe has devoted over 20 years to understanding and effectively analyzing small cap stocks poised to create above average returns. If you would like to receive timely penny stocks trading ideas like the ones described above, the Small Cap Network Newsletter is a tremendous free resource and starting point toward uncovering hidden gems in today's dynamic market environment.
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