Blog : Penny Stocks Take the Hit
by Peter Leeds on November 11th, 2011
It's been penny stocks that are taking the hit for all the economic woes the world is facing. When countries like Greece and Italy threaten to default on their debt, or America gets it's credit rating downgraded, investors tend to get spooked. And when they get spooked, the last thing on their minds are highly speculative, low-priced penny stocks.
Think of penny stocks like a water skier being pulled behind a motor boat called "large cap stocks." When the bigger stocks turn left, so too will penny stocks, but not right away. Eventually the water skier gets pulled by the rope, and only then do they follow.
The thing to remember about the water skier (and penny stocks), is that when they start catching up or adjusting to the moves of the boat, the skier / penny stocks actually move faster and cover a greater distance.
In other words, penny stocks and speculative stocks have been decidedly out of favor, while the whole world watches and waits for the sky to fall. This has taken all speculative potential out of the markets, and without that speculation, penny stocks lose a lot of their price premium. When large cap stocks recover, you can expect that soon after (but not right away) penny stocks will also rebound.
The result has been that penny stocks overall have had a very tough couple of months. This is the way it should be for the 95% of penny stocks that are junk in my mind, questionable companies with questionable business models.
Unfortunately, investors aren't able to distinguish the good from the bad, and in effect have thrown the baby out with the bath water. Great penny stocks with solid fundamentals and growing market share have seen their prices falling, often even without negative news or events. In fact, some penny stocks have even been dropping in share price in spite of some tremendous news.
So, here's what this means. If you've invested in penny stocks over this time, you haven't done as well as should be expected. However, as long as your investments are in high quality companies, like the ones that make the cut to be Peter Leeds Hot List picks, rest assured that they can weather the storm. Have patience, because an overall market breakdown based on European debt contagions may temporarily spook investors, but it will not hold those high quality penny stocks down indefinitely. Eventually, as the penny stocks report higher and higher revenue results each quarter, they will break out.
This is an example of when investors in penny stocks need to observe patience (as long as those penny stocks are ones that have passed Leeds Analysis and been posted to our Hot List). You may be rewarded very well as the companies buck the trend. In addition, the markets may recover on their own, taking the penny stocks back to more realistic levels in the very near term.
Penny stocks can be a nerve-racking game. However, in spite of a tough investment environment, the penny stocks that our subscribers are seeing should perform well, especially from these ridiculously low bargain prices.