Researching That Hot Penny Stock

We often get emails from readers asking for our opinion on the latest “hot” penny stocks and most of the time we have to give the same answer, “No clue. ” Unfortunately we don’t have the time to research most stock symbols sent our way as we are busy with our own work. The good news is that everyone can do their own research and decide whether a penny stock might be a good play or no.

So, you get a new symbol and you wonder if the stock is any good. One of the first stops we make is to the various stock message boards and see what people are saying about the company. Investorshub is usually chock-a-block with opinions, as is the Yahoo Finance message boards. Often you have to sift through the bashers and the pumpers as they jockey for attention but you’ll usually find plenty of independent opinion on everything from the management of the company to upcoming deals to patents and other good information. One of the most important things you’ll get is a sense of the morale of shareholders. Are they happy? Angry? Hopeful? What’s the vibe? Does everyone want to lynch the president? Are they talking about a class-action suit and a history of failed promises? Maybe that hot penny stock pick isn’t so hot after all.

One of the simplest of due diligence steps is often never made: just google the stock symbol. Anything come up? Is the EPA chasing the company for polluting the neighboring river? Is some celebrity endorsing the company? Is the New York Times Editorial desk praising management? Anything at all come up?

Another key stop on the investigative path is to look at the chart for the stock. What has the price and volume been doing the last few days? The last few weeks? The last few months? Is the stock on a steady downward path? Maybe it’s a falling knife that you don’t want to catch. Or perhaps the price has been going steadily upwards. Stocks usually move up for good reasons. Or maybe there is zero volume, zero price appreciation, nothing. Which means no one is interested in the stock. Should you be?

Some people couple charts with technical analysis and there are two good sites that provide such data for any stock: these are STOCKTA.com and BARCHART.com. What are the short, mid and long term buy/sell signals? These can add perspective to what you see in the chart.

What about news and press releases? Has the company been featured in any articles or news streams? What if anything is the media saying? Usually when you bring up a stock quote you will see accompanying news articles for the stock. If not, they are readily available on any major financial portal such as Google Finance. What is the company saying about itself? Are they even issuing press releases? Often times we go look at some “hot pick” only to find the company has not released news in many months. No bueno.

Another stop on the due diligence trail is to look at the company’s public filings. If the stock trades on the NYSE, AMEX, Nasdaq or OTCBB it will be required to file quarterly reports and financial statements to the SEC as well as annual reports that are audited. These are available on the EDGAR system, through most online stock brokerages, and on some financial portals like Yahoo Finance. Is the company making money? Losing money? How many shares outstanding does it have? What is management saying about the ongoing business? This and much more you will find here. If the company trades on the Pink Sheets it will probably not have filings with the SEC (though some do) but almost certainly will have unaudited filings with Pink Sheets itself. These can be found at the Pink Sheets site which is OTCMarkets.com. Definitely take a look at what the company is posting there. Some time ago Pink Sheets instituted a rating system for non-SEC reporting stocks which is as follows: Fully Reporting To Pink Sheets (Green Sign), Partially Reporting To Pink Sheets (Yield Sign), Not Reporting To Pink Sheets (Stop Sign), and a Problem Category (Skull and Cross Bones). There is another category titled “Grey Market” though these stocks are becoming more difficult to trade as each month goes by and ones you will certainly want to avoid. If the hot stock pick you are researching is any category other than green or yield, you have a potential problem and the company is probably best avoided.

We some times hit the jackpot by calling the Investor Relations phone for the company. Yes, these people are paid by the company to deal with shareholders and many times they have nothing useful to add, but you’d be surprised how often we run into an overly candid IR person who shares a wealth of juicy, private information that helps better evaluate the company. Definitely worth a call. And if there is no IR contact, try calling the company itself, tell them you are a prospective shareholder, and try to gauge their enthusiasm for the company. The last company we tried calling didn’t even answer the phone after repeated calls and you can guess what our take was on that stock.

And there you have a few tools that should bring clarity to any penny stock you look at: the chart, the message boards, the news, a web search, the public filings and a call to the IR contact or company itself.

All the best as always,
Jeff Mirkin
Admin

http://www.damngoodpennypicks.com

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