Blog : How to Get Rich: The Case for Special Situations

by Ed Zwirn on July 25th, 2014

You can call it either karma or the way the stock market has of balancing itself out: Recent blockbuster showings, especially for the large-cap indices, bring up both visions of sugarplums (albeit out of season) and fears of the acute indigestion to follow.

And fears of a stock market regurgitation cannot be dismissed out of hand. True, the market's recent performance has been reinforced by solid earnings, particularly among headliners like Facebook, which today posted its fifth better-than-expected quarter and sent its shares surging. These results dovetail with the apparent U.S. economic upturn seen over the past several months. The labor market has shown marked improvement while inflation, as evidenced by the latest CPI core reading of a 0.1% June rise, remains nonexistent, and real estate remains sluggish, ensuring a money pumping U.S. Federal Reserve Bank for the foreseeable future.

In any case, the upshot had the S&P 500 eking out a slight gain today to score its second consecutive record closing. The Dow Jones Industrial Average closed at 17,083.80, or 0.2% shy of its recent record close, and even the NASDAQ is only off 0.3% from the high it hit earlier this month. Penny stocks, which managed to achieve a 4.3% YTD gain through July 1, when the Russell 2000 small-cap index scored its most recent record close, have fallen 4.7% since then.

Clearly, this is a case in which individual investors are piling into the market. For the experienced investor, amateur hour on the stock market can prove a troubling spectacle, not the lease because herds can prove fickle. Beyond this basic type of existential/contrarian market angst, the bull faces real threats - U.S. economic growth notwithstanding - as global economic prospects remain uncertain and global military prospects look even worse.

But you can forget about all that global macro stuff, or at least hedge against it, by investing in one-trick ponies or, as some analysts call them, special situations. By these I refer to penny stocks making promising (and risky) bets on the latest technologies, medical treatments and marketing paradigms. Sure they may fail, but if they win they can win big and in either case will tend to do so independently versus the overall market.

I have run across many companies like this since I started working with Peter Leeds early last year. A few general examples (without revealing any trade secrets) may help explain what I mean. [Disclaimer: These are my own off-the-cuff generalizations and do not necessarily coincide with the boss's]:

-- Biotech/Pharma: There is nothing to compare with the unambiguously good feelings bound to arise when you wake up one morning and find out that a recent investment of yours has cured a form of cancer and made you a bundle in the process. Provided it is well funded, a research-stage company can weather all kinds of market turbulence while offering tremendous upside. Sure, clinical trials can reveal bad news as well as good, but because these are specific events impacting special situations they operate independently of market risk.

I've seen this factor in play with two Peter Leeds Penny Stock Newsletter Hot List members over the past week or so. One, a scrappy pharmaceutical venture, announced Monday that it had begun clinical trials for a subdermal treatment for opioid dependence. On Thursday, another Hot List pick announced promising results in a breast cancer treatment trial. If either of these developments pan out further, they will be market-proof game changers. Put another way: Even if a Depression were to come, people (and governments) will shell out for breast cancer and drug addiction treatments. No need for marketing studies.

-- Industrial situations: Among other updates published on our members' site this week, we were pleased to announce that a December Hot List pick reached nearly triple its profile price this week. This company, which deals in both assembled electric products and components and environmental monitoring and control and filtration systems for industrial processes, recently announced very large sales spikes throughout its business units.

-- Tech sector: Beyond Facebook, the tech sector has many bright names and youthful faces both suggesting optimism and already transforming the way we do business. Want to lose money (or at least limit your upside), buy one of them.

On the other hand, special situations abound in the tech sector, along with risk. Also this week, Peter Leeds Penny Stock Newsletter subscribers were pleased to find out that one Hot List member, heavily involved in network equipment for broadband applications, scored a 31% daily spike following the release of earnings.

That being said, tech stock can be frightening and not friendly to novices. Trying to get your head around the latest revolutionary business plan of a company and whether it has any chance of succeeding may be a dicey prospect. On the other hand, similar to the unambiguous good feeling occasioned by a medical sector score, there is nothing like being able to brag to your grandchildren about how you got rich on being sagacious enough to get in on the next big thing. There are still some geezers alive who got in on the IBM floor.