by Jamie Dlugosch | December 8, 2008 7:30 am
What exactly is a penny stock[1]?
Well, there are numerous definitions. For me, I look for companies with market capitalizations that are less than $500 million. I want stocks trading on a U.S. exchange, and I’m not looking to buy shell companies.
There also needs to be a reasonable business behind the stock. From there, I look at fundamental value to drive my decisions combined with technical analysis. Volume is important, and very thinly traded stocks are to be avoided.
Based on these criteria, here are five stocks that belong in any portfolio[2]. Yes, there is a high degree of risk with these picks, but, so too, is the potential reward.
The Texas hold ’em poker craze is alive and well despite a horrible economy and a regulatory environment in the U.S. that prohibits electronic play. You could say that The World Poker Tour, operated by WPT Enterprises Inc. (WPTE[3]) had much to do with fueling the popularity of the game.
The company’s innovative television productions of large dollar cash tournaments have been a staple now for many years. Unfortunately, WPTE has yet to capitalize on its brand. In fact, I recommended shorting this company when shares traded in the teens.
With shares currently languishing at $0.50 a share, now is a great time to buy this penny stock. The main reason for my optimism is that a new way of doing business in Washington that should result in a more favorable legislative environment for WPTE. If so, online efforts by the company could be very profitable for investors. Buy shares before the change come.
Talk about throwing the baby out with the bathwater. While we endure a massive de-leveraging process that has cut values across all asset classes, there is a case to be made that some selling of company shares has gone too far.
That is the case of TriQuint Semiconductor (TQNT[4]) where shares have fallen from a 52-week high of $7.08 per share to a low of $1.67 — despite the fact that the company has minimal debt and some $0.50 per share in cash on the balance sheet.
The good news: TQNT is positioned to withstand an economic downturn, even a horrible downturn like we’re now facing.
Oh, but wait. TQNT is making money. Analysts estimate the company will earn $0.43 per share next year. You won’t find a better bargain in this market. I would buy TQNT at these prices.
Are you looking for a penny stock that can deliver a 500% gain? If so, the formerly named Input/Output Corp. may be the one for you.
Now operating under the name ION Geophysical Corp. (IO[5]), this provider of seismic imaging software and equipment for use by the oil industry has seen its shares fall from a yearly high of $18.26 per share to a low of $2.14. Yes, oil prices have collapsed from their peak this summer, but the complete obliteration of value in the sector is overdone in my opinion. IO has minimal debt and is expected to make close to a dollar per share in earnings in 2009 according to analyst estimates. I can appreciate interest in alternative energy, but exploring for oil will be with us for some time.
I’d buy IO at these levels and wait for the craziness in crude prices to abate. When prices stabilize, IO could rocket higher in a short period of time.
We can blame our entire fortunes on the homebuilding sector. Cheap money fueled an unprecedented boom in real estate that ultimately crashed like the house of cards that it was. We can find many reasons for the debacle, but one interesting aspect of the whole mess is the underlying demand for new products that manifested itself in new purchases.
Although new purchases have plummeted, demand for quality and newness has not abated. To me, that means a big boom in remodeling projects. It’s all we can afford — hence my affinity for Home Depot (HD[7]) and the small remodeling company selling its products — U.S. Home Systems, Inc. (USHS[6]).
Shares of USHS trade for less than $2 per share, but the company has minimal debt and more than a dollar per share of cash on the balance sheet. When housing turns, so too should the fortunes of USHS.
Penny stocks become very big deals because they make products with potentially very large markets. That is true with Osteotech Inc. (OSTE[8]). This company serves the aging population with bone and tissue products that improve the quality of life.
OSTE trades for $1.57 per share with a market cap of just over $28 million. The company has minimal debt and approximately $1 per share in cash. With the aging of an active baby boomer generation, OSTE is positioned to grow rapidly. Forget about short-term issues with the economy, and focus on the long term.
With good fundamentals and a promising future, OSTE makes sense for any penny stock portfolio. The company should be profitable in the current fiscal year and should break even in 2009. If things go well, profits should return thereafter.
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