Blog : Penny Stocks Beat Bull Market

by Ed Zwirn on May 29th, 2013

It's official: Penny stocks and other small-cap shares have not only followed the broader market, but they've actually outperformed so far this year.

The small-cap Russell 2000 index, which last week broke through 1000 for the first time in intraday trading, currently stands at 997.35 and is up over 17.4% so far this year, a better performance than seen for the Dow Jones Industrial average.

But the performance of penny stocks is even more impressive relative to the large companies of the DJIA when you take a broader view. In March 2009, Russell 2000 was at 343, and has nearly tripled since.

Explanations for this penny stock bull market are varied.

As Federal Reserve Chairman Ben Bernanke pointed out in recent Congressional testimony, continued and long-term low interest rates are flushing money out of safer investments into riskier ones as individual investors and money managers search for yield.

For another thing, companies in the penny stock realm are almost always less diversified and are often in the developmental stage and so may have less direct exposure to shocks from the European Central Bank and other scary places. Scares from places like Cyprus have provided significant headwinds to slow down the current bull market, but investors in a pharmaceutical company awaiting a regulatory approval generally ignore things like this.

But whatever may be fueling the penny stock party, the results are impressive all the same. Bear in mind that I am not touting performance statistics from stocks screened by Leeds Analysis, your own knowledge or some other source of expertise. This is the result you would have gotten if you had bought into each Russell 2000 stock on Dec. 31, doing no research, and sold today (May 29).

But you can and should be doing even better than this. A more selective approach to penny stock investing than index buying can eliminate the obvious losers from the pack and concentrate on those companies with business plans likely to bring on outsized returns. Of course, there are no guarantees in the penny stock (or any other) business but the prospects are good, at least as long as the party lasts.

P.S. Take a break from your penny stock due diligence and check out our penny bank contest. All you have to do is guess how many pennies are in Peter's penny bank and you get a good chance of winning great prizes.