Todays Hot Penny Stock

In most years most stocks go up…the stock market is up.  Much of the time the stock market is not real interesting, with stock prices fluctuating moderately.  Most of the time we are in a bull market, where stocks go higher.  In a bear market prices fall.  When stock prices are crashing this is an exception that definitely gets the public’s attention.

This is especially true today, because millions of clueless investors have their financial futures riding on stocks (stock funds) in 401(k) and IRA plans.  Here’s your basic investor guide to bear markets of the recent past.  How bad have stock prices fallen before, and how does this compare to 2007-2009?

In measuring stock market or average stock performance, we will focus on the DOW JONES INDUSTRIAL AVERAGE (DJIA).  This stock indicator is the oldest and still the most popular with investors, often referred to as simply the DOW.  It tells you how the big blue-chip stocks are doing, and basically indicates how stocks in general are performing.

Historically, stocks have returned about 10% a year over the long term.  If the Dow drops 5% in a week, the vast majority of investors lose money.  When it drops by 20% or more over a period of time we are in a bear market, and virtually all stock investors (except the rare speculator) lose money.

History can give us a sense of perspective, and serve as a basic investor guide.  Now let’s look at some truly ugly stock markets.

The bear market that started in 1929 was the worst in American history, with the Dow falling 89% at its low in 1932.  It took about two decades for stock prices to then return to their previous highs of 1929.  A major reason for the market crash: excessive financial leverage.  Investors had bid up stock prices with borrowed money.

1973-1974:  In less than two years the stock market fell 45%.  This bear market was accompanied by rising interest rates and higher inflation.

2000-2002:  The Dow fell 38%, but growth stocks got hammered (especially hi-tech stocks).  The NASDAQ Composite Index fell 78% in less than three years.  Stocks that had gone up like a rocket fell to earth like a rock.  Investor speculation created excessive stock prices especially in areas related to personal computers, the internet and cell phones.

2007-2009:  After rising for about five years, stock prices started falling in the autumn of 2007.  A year later financial crisis acted as a catalyst and the market took a nose dive.  In early 2009 stock prices were down over 50%.  The world’s financial system, and economies across the globe, were in serious trouble.

Once again excessive financial leverage and speculation played a major role.  Major financial institutions,other corporations, investors and homeowners all participated in this game.  Financial leverage is simply investing with borrowed money.  Some major Wall Street firms went to incredulous extremes.  Some folks on Main Street did as well, speculating on real estate properties with little or no money down.

To sum it up, the bear market that started in late 2007 is the worst since the Great Depression.  The end can not be accurately predicted.  Investors generally focus about six months into the future.  When, and only when, they  see a brighter future they will start buying and send stock prices higher.  If the trend continues, a new bull market is born.

I heard a great story about Warren Buffett recently.  One day Warren was riding in the elevator at his office in Omaha.  A few other people got on the elevator as well.  In the middle of the floor was a shinny penny. Everyone had a chance to pick it up, but nobody did.  Finally after a few seconds Warren reaches down and picks it up.  He looked at it for a moment then slipped the penny into his pocket.

Rumor has it, he said “the start of my next billion” as he put the penny in his pocket.

I don’t know if the story’s true or not, but it sounds like something he would do.  We all have dreams of turning pennies into millions (or billions in Warren’s case).  Some people have a knack for making money out of almost anything.

In the stock market, there’s a high risk, high reward way to make lots of money.

 Investing in Penny Stocks.

Now before you question my sanity let me ask you a question?  Have you ever traded penny stocks?  Do you even know what a penny stock is?

There are hundreds of definitions for a penny stock.  Some investors think very literally.  Only stocks that trade for pennies a share are penny stocks.  The US Government defines penny stocks a little more liberally. Here’s the quote right from the SEC website:

The term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies.  While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink-Sheets, they may also trade on securities exchanges, including foreign securities exchanges.  In addition, penny stocks include the securities of certain private companies with no active trading market.

Look, forget all that legalese and government mumbo jumbo.

For me a penny stock is a publicly traded company whose entire market value (their market cap) is very small.  See, stocks are classified according to their size.  Large cap stocks are worth more than $50 billion.  Mid cap stocks are worth $10 to $50 billion.  Small cap stocks are worth $1 to $10 billion.  And micro-cap stocks or penny stocks are worth from $50 million to $1 billion.

How do you classify companies worth less than $50 million . . . I call them hobbies!

Seriously, if you’re able to invest heavily in one of these micro-cap penny stocks just as it starts to grow, you can make some serious money.

Do you want an example?

About a year ago I was doing some research on the coal industry.  If you don’t know, coal’s one of the biggest sources of energy for the United States.  Some people have even crowned it “King Coal” and called the US the Saudi Arabia of coal.

To say we have lots of the stuff is an understatement.

While I was doing some research I came across a very interesting company, James River Coal (JRCC).  The company was founded in 1988 and produces coal for sale to electric utilities and industrial consumers. They have 6 mining complexes, 26 underground and surface mines, and 10 preparation plants.  All told the company has more than 265 million tons of proven and probable coal reserves.

Not bad for a little company that in August of 2007 was selling for less than $5 a share.

James River Coal was a penny stock.  The entire company was worth less that $125 million dollars.

Coal prices however were starting to go up and up and up.  And do you know what went up and up and up along with prices?  That’s right, the stock prices of all the coal companies.  Not just James River Coal but some of the big players too.  Companies like Arch Coal (ACI) and Massey Energy (MEE) watched as their stock climbed.

So how can you make money trading these penny stocks?

The stock for JRCC was stuck below $5 for months and traded below $10 for almost half a year.  You could have bought all you wanted.

Then as oil prices and coal prices started to climb the stock just took off.  In less than a year the stock skyrocketed from penny stock status to more than $60 a share.  You read that right . . . more than $60 a share.

JRCC returned more than 1,100% in less than a year!

Now you’ll notice the stock’s recently fallen in price.  That’s no doubt due to many investors taking their huge profits off the table.  Despite this recent correction, the stock’s still up more than 500%.

Now you see how investing in penny stocks can be so valuable?

Don’t forget, like anything, investing in a penny stock does have some risk.  Make sure to do your due diligence and discuss with your broker all the risks and potential rewards of penny stock investing.