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 recovery is high unemployment and consistently negative GDP growth. The thing is, those issues - as well as significant corporate losses - are troubles that haven't been overcome before. It may still be challenging in 2009, but the market's growth/contraction cycle is ultimately reliable.
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, the twelve-month gain following a market bottom is approximately 32%. Removing the very first week of that twelve-month rally, however, pulls that gain down to only about 24%. Take out the first three months of the recovery rally, and your gain is merely 15%. Point being, an investor just can't wait for a perfect time to become bullish.
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.
In other words, small cap stocks - and many penny stocks - have offered the biggest returns at a point in time when few investors were interested in owning any stocks at all. If that somewhat rings a bell, it may be because we're seeing the same scenario now.
Sure enough, in the aftermath of 2008's debacles and 2009's stimulus efforts, many of these small cap stocks and penny stocks are starting to perk up ... not unlike how we saw 1991 and 2003 unfold.
Take Neoprobe Corp. (OTC:NEOP) as an example. Shares gained 99% in calendar 2008 despite the company not being profitable, yet. The motivation for the buying is what may come next year; analysts are expecting earnings of 10 cents per share. For a stock trading in the 60 to 70 cent range, the forecasted P/E of around 6.5 means the rally could continue into the year.
WorldGate Communications Inc. (OTC:WGAT) is another example of a micro cap company that started to thrive in the height of the recession. WorldGate swung to a profit in the third quarter of 2008. More important to investors, the stock rallied from 1 cent to a peak of 39 cents between November and December of 2008.
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. - 21151
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 recovery is high unemployment and consistently negative GDP growth. The thing is, those issues - as well as significant corporate losses - are troubles that haven't been overcome before. It may still be challenging in 2009, but the market's growth/contraction cycle is ultimately reliable.
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, the twelve-month gain following a market bottom is approximately 32%. Removing the very first week of that twelve-month rally, however, pulls that gain down to only about 24%. Take out the first three months of the recovery rally, and your gain is merely 15%. Point being, an investor just can't wait for a perfect time to become bullish.
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.
In other words, small cap stocks - and many penny stocks - have offered the biggest returns at a point in time when few investors were interested in owning any stocks at all. If that somewhat rings a bell, it may be because we're seeing the same scenario now.
Sure enough, in the aftermath of 2008's debacles and 2009's stimulus efforts, many of these small cap stocks and penny stocks are starting to perk up ... not unlike how we saw 1991 and 2003 unfold.
Take Neoprobe Corp. (OTC:NEOP) as an example. Shares gained 99% in calendar 2008 despite the company not being profitable, yet. The motivation for the buying is what may come next year; analysts are expecting earnings of 10 cents per share. For a stock trading in the 60 to 70 cent range, the forecasted P/E of around 6.5 means the rally could continue into the year.
WorldGate Communications Inc. (OTC:WGAT) is another example of a micro cap company that started to thrive in the height of the recession. WorldGate swung to a profit in the third quarter of 2008. More important to investors, the stock rallied from 1 cent to a peak of 39 cents between November and December of 2008.
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. - 21151
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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