I read this SmartMoney piece entitled: Penny Stocks Aren’t Worth a Dime. It’s one of many articles that have come out recently bashing micro caps.
Many investors, institutions, financial journalists love to broad brush all penny stocks (micro cap) as this uninvestable investment class. In some ways they are right, 90% of penny stocks are either scams, frauds, or just shouldn’t be public. However, there are many micro cap stocks, even nano caps that bear watching. I’m talking about the ones that are growing, profitable, have real tangible assets and cash flows, that for whatever reason have gone un noticed.
Successful penny stocks go through a maturation of their investor base, and I’m not referring to $20 stocks (small caps) that move down to $1 (micro caps), but companies that started as micro caps. In these cases as the company performs, the stock increases and attracts different classes of investors. In the beginning there are only small retail buyers, then larger retail, then small institutions, etc. By the time a stock goes from sub $1 to $5, institutions hold a decent sized percentage of the float.
Just as this latest bash attempt at the micro cap space illustrates, most institutions won’t look at a stock under $5. This is great, and this is why there is so much opportunity for those smart enough to find the great micro caps that exist. I hate quoting myself because I’m not that important but, “I am the dumb money and I sell to the smart money”. This simply means, it is great that most investors (retail and institutional) don’t buy penny stocks because somebody has to buy my stock from me at $6 that I bought at $1.
The key in micro cap is two fold: 1.) Finding the right companies 2.) Finding them before the “smart money”.
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