MicroCap Speculator - Penny Stocks

We Are Back

2009-02-11T09:31:00.002-05:00

We are back!

The MicroCap Speculator took a hiatus in 2008, which, in hindsight was a good thing based on what the market did. However, we will now be updating the posts on a regular basis and enrolling subscribers in our paid service again.

The Top Ten Most Active OTCBB stocks of 2/10/09

Symbol	Last Sale Price	Net Price	% Price Change	Share Volume
GGLB	0.0001	-0.0001	-50%	151,351,341
CMLT	0.0001	0	0%	88,459,899
GNTA	0.0141	-0.0008	-5.40%	71,915,613
CBAI	0.0179	0.0011	6.50%	66,663,378
ASVN	0.0001	0	0%	37,858,807
SPNG	0.0163	0.0014	9.40%	31,800,666
UVSE	0.0001	0	0%	30,282,117
GSPG	0.0156	-0.0004	-2.50%	26,676,148
ONEV	0.0058	0.0011	23.40%	24,665,041
JNIP	0.0007	0.0002	40%	21,372,597
MOBL	0.0005	-0.0001	-16.70%	18,977,870
CYBL	0.0015	0.0004	36.40%	16,668,200
QMLM	0.0012	0	0%	13,351,384
ACII	0.0007	-0.0002	-22.20%	13,038,449
ARSC	0.001	-0.0001	-9.10%	9,856,797
ECGA	0.0002	0	0%	9,582,815
AERP	0.0004	0	0%	8,906,000
SOLM	0.0067	-0.0011	-14.10%	5,856,725
SLGLF	0.0085	0.0005	6.30%	5,351,248
SOFN	0.0008	0	0%	5,160,703
MCET	0.0197	-0.0023	-10.50%	3,732,629
MDFI	0.0006	0	0%	3,692,030
IVIT	0.0001	-0.0001	-50%	3,539,000
VTEX	0.0098	-0.0012	-10.90%	3,411,044
WOAM	0.0005	0	0%	3,140,000
WLSI	0.0019	0.0002	11.80%	2,921,379
GERS	0.013	0.002	18.20%	2,849,212
NTNI	0.0019	-0.0016	-45.70%	2,635,000
LXES	0.002	0	0%	2,621,775
IDOI	0.0012	0	0%	2,566,250
VTLP	0.025	-0.006	-19.40%	2,540,623
MOBI	0.005	0	0%	2,396,009
CGFI	0.0175	0.0005	2.90%	2,350,489
PCFG	0.0045	0	0%	2,328,184
GCHK	0.475	0.065	15.90%	2,256,690

Gulf Ethanol - What is it all about?

2008-01-07T07:46:00.002-05:00

We are pressed for time today, so there will not be a detailed post. However, we have noticed that a Pink Sheets company call Gulf Ethanol (GFET.PK) has been doing a great deal of advertising regarding the stock of their company, which interests us. Is it a worthy company? Is this another pump and dump? We will be taking a look at this company, which now trades at $1.45, over the next few days...stay tuned.

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GoldSpring still worth looking at

2008-01-04T07:53:00.000-05:00

On December 22, 20007, we posted a blog where we thought GoldSpring (GSPG) was worth a look, at the time the stock was trading at $0.013, it has since traded up to $0.015and as low as $0.010. We still feel the stock is worth looking at.

Here is some news from the company on Jan 3, 2008.
GoldSpring, Inc. (OTC Bulletin Board: GSPG) announced today that the second round of drilling will commence today. GoldSpring performed in-house atomic absorption assays of the first drill holes and they are encouraged by the results. The Company has sent the drill samples to American Assay, an accredited lab, for third party verification. The Company expects American Assay results before month end at which time GoldSpring intends to publish the results from phase 1 drilling.

Additionally, the stock continues to be the most traded stock on the OTCBB with 67 million shares trading hands. The next closest was AKNS at 22 million shares.

Also, YTD the DJ Gold Mining Index is up 8.47%, which is leader so far in this short year. It is followed by the Heavy Construction Index at 5.21%.

We hold no position in GSPG.

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Recession Proof Your Portfolio

2008-01-03T09:27:00.000-05:00

If you have read any financial columns in the past month, it appears that everyone and their brother believes we are headed for a recession in 2008. The best that I can figure is that these "so-called" experts believe it will happen in the later half of 2008. The one sure fire way to recession proof your portfolio is get involved in gold. Here is a list of high flying gold penny stocks.

AMUG American Utd Gold Corp
DMDD Diamond Discoveries Intl
AMXG Ammex Gold Mining Corp
SLGR Stallion Group
HVGO Hanover Gold Inc
CUSIF Cusac Gold Mines Ltd
APLL Apolo Gold & Energy Inc

We do not hold positions in any of the above and encourage you to do your own due diligence.

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New Year's Resolutions

2007-12-31T08:04:00.000-05:00

Well, that time of year is upon us where everyone starts making resolutions to lose weight, get a better job, blah, blah...While there is nothing wrong with resolutions you are more apt to meet them if you lay out a specific goal and little steps to acheive that goal. So, what does this have to do with penny stocks or investing? I'm sure that many of you have a resolution/goal to become a better investor or trader in 2008, which is admirable. I would suggest getting a plan and figure out what you need to do to meet the goal. Some steps I would suggest are:

1) Look back at your trades in 2007 and see if there are any trends. Did you get out of trades too early? Did you add to losing positions? Were you stopped out on a regular basis? Once you determine this you can start formulating a plan

2) Create a trading plan. A great book for assisting with this task is Rules of the Trade.

Determine what type of stocks you will trade
Detemine rules for entry and exit
Start a trading log

3) Educate yourself on the type of trading you are doing. Buy some books and read them.

4) Subscribe to newsletters. However, don't follow the advice blindly. Take the recommendations and due you own due diligence to determine if the trade meets your risk parameters, etc.

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10 Worst Performing Industries in 2007

2007-12-30T14:29:00.000-05:00

Think back over 2007 to all the big stories you read about in The Wall Street Journal, Investor's Daily or heard on CNBC. What comes to mind?

I'm sure the bursting real estate bubble and the subprime mess is on your list. I'm sure high gas prices is on the list, if not I'm sure you complained about them during 2007. How about Citibank taking a HUGE loss. Well, it comes as no surprise that the 10 worst performing industries in 2007 are all related to those stories.

Without further ado, here is the dubious list.

10 Worst Performing Industries in 2007
DJ US Home Construction Index	-56.31%
DJ US Mortgage Finance Index	-52.36%
DJ US Specialty Finance Index	-45.28%
DJ US Airlines Index	-37.16%
DJ US Real Estate Holding & Development Index	-31.30%
DJ US Home Improvement Retailers Index	-30.81%
DJ US Banks Index	-29.02%
DJ US Consumer Finance Index	-27.73%
DJ US Business Training & Employment Index	-26.70%
DJ US Transportation Services Index	-26.67%
Average Return for 10 Worst Performing Industries	-36.33%

The lesson to the story here is just because the pundits are screaming doom and gloom doesn't mean there isn't money to be made. Plenty of people got very wealthy on the demise of the real estate bubble. There is always a way to play the downside. For example, this year I was heavily invested in an UltraShort Real Estate ProShares ETF (SRS) that did quite well, up 75% since it started trading in March.

While the stocks we profile aren't part of these indices there are penny stocks that could have been shorted such as: TOUS, DHOM and CHCI. In fact, DHOM and CHCI are still good canidates to short. They are both traded on the NASDAQ and are in jeopardy of being delisted.

As always do your own due diligence.

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Top 10 Peforming Industries in 2007

2007-12-29T09:21:00.000-05:00

Below are the top ten performing industries during 2007, while there are really no surprises in the list. Keep in mind all commodity mining that went on in 2007 requires big machinery to mine and transport, hence the Heavy Construction Index up 91.5%. While the indexes below are Dow Jones and penny stocks don't belong to them, a great way to find penny stocks that may explode is to find companies in these high performing industries.

Tomorrow we will take a look at the worst performing industries and what can be learned from them.

10 Best Performing Industries in 2007
DJ US Heavy Construction Index	91.50%
DJ US Coal Index	71.70%
DJ US Mining Index	55.34%
DJ US Specialty Chemicals Index	46.27%
DJ US Oil Equipment & Services Index	44.30%
DJ US Nonferrous Metals Index	44.22%
DJ US Exploration & Production Index	42.85%
DJ US Commercial vehicles & Trucks Index	42.71%
DJ US Oil Equipment & Services and Distribution Index	41.50%
DJ US Tires Index	38.42%
Average Return for Top Ten Performing Industries	51.88%

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Songzai International Holding Up 1200%

2007-12-27T07:32:00.000-05:00

On October 17, 2006, we profiled Songzai International (SGZI) at $0.07 per share. On September 25, 2007, the stock was trading at $0.93 per share. That is an increase of 1228%! A $500 investment in the stock would have been worth $6642, not a bad return. However, what can we learn from trades like this? Why did this stock go up so much? Why did we profile it to begin with?

First, Songzai is a Chinese company. The emerging/foreign markets were on fire during 2007. In fact, iShares FTSE/Xinhua China 25 Index was the second best performing ETF during 2007, it was up 61.51% for the year.

Secondly, Songazi is a coal company. The DJ Coal Index was up 77.30% for 2007.

Third, the price of coal was on the rise at the time of the profiling. What we wrote at the time was, "The average selling price of coal in the first half of 2006 was $22.5 per ton, compared to $17.5 per ton during the same period in 2005. The rising price of coal will assist Songzai in achieving profitability."

Fourth, at the time of the profiling, net sales were up and expenses were down.

Lastly, the stock was in an oversold state which allowed for a good entry into the trade.

Overall, what you can learn is, pick a stock in a booming sector(s), a company whose financials are improving - ideally the company should be profitable and look for a stock in an oversold condition that allows you to buy the stock "on sale".

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MicroCap Seasonality

2007-12-26T07:48:00.000-05:00

I stumbled upon an interesting article involing the performance of microcap stocks in January. Mark Hulburt from Barrons crunched data provided by two finance professors, French and Fama, from 1926 to 2004 to see if microcap stocks really outperform large cap. The average return of the stocks in the portfolio containing the smallest-cap stocks was 17.1% on an annualized basis between mid-1926 and the end of 2005, versus 10.2% for the quintile that had the largest-capitalization stocks -- for an impressive difference of 6.9 percentage points annually.

However, when you drill down further into the data, you find that the bulk of the microcap return occurs in January. Here are the details.

Here are the annualized micro-cap returns by month from July 1926 to December 2004:

January.........159.82%
February.........25.10%
March...............1.21%
April................12.86%
May...................6.85%
June..................6.57%
July.................22.64%
August.............8.16%
September.......-7.75%
October..........-14.60%
November..........7.97%
December.........-1.94%

So, armed with this information, what investment/trading options do you have? There are a few.

1) Purchase shares of IWC
2) Purchase Januray calls for IWC (IWCAZ.X, IWCAC.X or IWCAD.X)
3) Purchase any number of small cap funds

We hold no position in any of the above.

Here is a link to the original article.

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Merry Christmas

2007-12-25T19:58:00.000-05:00

We would like to wish everyone a Merry Christmas and a Happy New Year.

We will be sending out our next subscriber alert on 12/26 - don't miss it! Turbo charge your trading in 2008.

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Great Sites for Due Diligence

2007-12-24T09:09:00.000-05:00

We use a number of sites when performing our due diligence for our Tuesday picks, however there are three sites that we use frequently, they are:

1) Tradersnation.com - it has an endless list of interview with CEO's
2) Smallcapcenter.com - the best source of small caps on the 'net
3) Stocklemon.com - it investigates many small caps to see if there is anything fishy.

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Shorting MicroCaps

2007-12-23T11:52:00.000-05:00

If you are looking for a new trading idea in 2008, why not take a look at shorting some microcap companies. Granted many brokers will not allow you to short OTCBB stocks, however many are good candidates. If you take a look at many companies from 2004 or 2005 that were the high fliers, you may find that many of them trade at below penny prices these days - why not make money on the way down. Here is a good place to start finding some potential shorts.

List of OTCBB Filing Delinquent Companies as of Dec 21, 2007

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GoldSpring (GSPG) A Speculative Play

2007-12-22T08:20:00.000-05:00

GoldSpring Inc. reached a new 52-week high of $0.0147 on 12/21/07 on volume of 70 million shares. The stock may be worth taking a look at for speculators, for the following reasons:

1) Ample volume and climbing stock price.
2) Receives much press via the "penny stock news release" companies
3) GoldSpring, Inc. recently announced today that it has entered into an agreement with Orbit Garant Drilling, Inc., one of the largest drilling companies in North America, to perform exploration and developmental drilling at its Comstock Lode Project. The drill rig and crew are scheduled to arrive today, and the Company expects drilling to commence this week.

Due your own due diligence.

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5th Characters in Stock Symbols

2007-12-21T10:31:00.000-05:00

For any of you who have researched penny stocks you have seen stock symbols on the OTCBB with 4 and 5 symbols. The fifth symbol many times should be a red flag to you wheter you should trade the stock or not. Here is a list of the fifth symbols and what they mean.

Listed below are the fifth letter identifiers and a description of what each represents:
Character Description
A Class A
B Class B
D New
E Delinquent in required SEC filings
F Foreign securities, except ADR’s
G, H, & I Additional warrants or preferreds
J Voting
K Nonvoting
L Miscellaneous situations, such as stubs, depositary receipts, second units, or additional warrants or preferred
M Fourth preferred, same company
N Third preferred, same company
O Second preferred, same company
P First preferred issue
Q Bankruptcy - involved in bankruptcy proceedings
R Rights
S Shares of beneficial interest
U Units
V When-issued and when-distributed
W Warrants
Y ADR (American Depositary Receipts)
Z Miscellaneous situations, such as stubs, depositary receipts, limited partnership units, or additional warrants or units

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Microcap Speculator - Affiliate Program

2007-10-08T07:45:00.000-04:00

The MicroCap Speculator is starting an affiliate program and we would like you to be part of it. We are and established penny stock alert service and our product has been wildly successful in our almost 4 years of our existence; we have 1000’s of subscribers and have an outstanding track record, go to microcapspeculator.com to see for yourself. If you put one hour per day into this program, you could make enough money to take your family on vacation or buy a boat or get the new car you have always wanted or put a down payment on a house. Get on board early to start making profits on our newsletter. When you join our program you will receive $50 FOR EVERY PAYING SUBSCRIPTION!

WHAT YOU NEED:

Nothing! There is no webpage required with our affiliate program, you will receive your own webpage and link.
A desire to make money by marketing an excellent and established service to

WHAT YOU DON’T NEED:

You do NOT need knowledge of penny stocks.
We do all the work regarding the recommendations and will answer all questions regarding the service.

WHAT YOU GET:

* You collect $50 from every paying customer.
* Your own webpage and link.
* Training package that includes places to advertise, keywords and search engine placement.

WHAT IT COST:

Nothing! There is no risk, none at all, to become part of our affiliate program. So, what are you waiting for, there is nothing to lose and everything to gain.

What are you waiting for? Take action now!

Send us your name and e-mail at sales@microcapspeculator.com if you are interested in making extra money.

Penny Stocks and SPAM

2006-09-18T15:35:00.000-04:00

Lately, I have been recieving a ton of spam about regarding the next penny stock that is going to take off and become the next Exxon Mobil or Microsoft. While I highly doubt it, it did get me curious if a trading plan could be devised regarding the trading of penny stocks advertised via spam. My plan is to set up a fictious portfolio, where I purchase $1000 worth of the "spam" at the closing price price for the day and then sell it when I believe the top has been reached. Stay tuned over the next several weeks, as I report on my findings.

Glencairn Gold (GLE)

2006-09-12T09:15:00.000-04:00

As many of you know, we are bullish on gold - even though it took a hit yesterday. One of our recent picks, Glencairn Gold (GLE) recently announced the purchase of a new property.

Glencairn Gold Corporation (TSX:GGG.TO - News)(TSX:GGG-WT.TO - News)(AMEX:GLE - News) is pleased to announce the acquisition of a 100% interest in the Mestiza property in Nicaragua. The property is 70 kilometres by road east of the Company's Limon Mine.

The property represents a key block of ground covering approximately half the strike length of a 2.4-kilometre-long, gold-bearing structure known as the Tatiana Vein. The remainder of the Tatiana Vein is on the La India property already held by Glencairn. Along half its strike length, including the Mestiza portion, the Tatiana Vein hosts an inferred resource of 689,700 tonnes grading 10.3 grams per tonne gold containing 228,000 ounces of gold. The deposit is open in both directions, and at depth. Glencairn has agreed to pay the Mestiza Property owners approximately $2.4 million over 42 months.

"We view Tatiana as potentially providing high grade feed to the Limon mill, at a target rate of 300-400 tonnes per day," said Glencairn Chairman Kerry Knoll. "This has the potential of adding another 20,000-35,000 ounces a year to Limon's output." Limon is estimating production of 38,000 ounces in 2006 and 52,000 in 2007.

The Company will begin a drilling program as soon as possible with the purpose of upgrading the resource to reserves. This will be followed by an internal feasibility study on the viability of mining and truck haulage to the Limon mine. The Santa Pancha and Talavera zones at the Limon Mine property, in continuous production since 1941, will continue as the prime source of mill feed. The mill at Limon mine has sufficient capacity to process the additional ore that would be produced from the Mestiza property.

The Mestiza property is 200 hectares and now comprises part of the larger La India land package of 9,680 hectares.

We are in the top 1% in the CNBC Stock Challenge

2006-05-03T09:47:00.000-04:00

We entered the CNBC Stock Challenge that started on April 4. Everyone started with a fictitious $1 million dollar account and over the past month we are up 41.1% with an account value of $1,411,659 as of the close of trading on May 2. While we are proud of our top 1% ranking (there are approx. 50,000 participants) we were hoping for a top fifty finish.

Our strategy during the game was to:
1) Invest in a hot sector – we chose gold
2) Invest in no more than 2 stocks
3) Invest in the lowest share price possible (the rules of the game stated the company needed a market cap of 500mil)
4) Invest in profitable companies

We ended up investing in NXG and IAG, with about 80% of the money going into NXG. While this strategy worked well in the game, it is an unrealistic strategy that one would employ in “real life”.

Patience and Due Diligence always payoff...ZENX

2006-04-25T15:08:00.000-04:00

We have found in the three years we have been providing our service to microcap traders and speculators that our ideal holding time is approximately 3 to 5 months. We believe this to be because we recommend very small and undiscovered companies that are profitable and are in a sector with a great deal of momentum. One example of this is our recommendation on January 3, 2006. Here are the details:

Company: Zenex International (ZENX)
EPS: $0.24
Sector: Construction
Share Price: $0.465

After doing our due diligence we felt the company was extremely under priced and recommended it to our subscribers on January 3, 2006 at $0.465 per share.

That was then; this is now…ZENX closed at $1.95 per share on April 24, 2006, that is an increase of 319%.

The company seemed extremely under priced…fast forward 4 months to April 24, 2006 and you will find the stock trading at $1.95 and increase of 319%. If you bought 2150 shares on January 3 at $0.465 your $999.75 investment would now be worth $4192.50.

To see our original recommendation click here.

Can you really afford to miss trades like this?

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Littlefield Corp (LTFD) continues to climb!!!

2006-03-29T16:14:00.000-05:00

Littlefied Corp (LTFD) continued its metoric rise today. It had an intraday high of $1.60. It is now up 88% since we recommened one week ago.

Littlefield Corp. (LTFD) hit new 52-Week High!

2006-03-28T16:34:00.000-05:00

Littlefield Corporation (LTFD), through its subsidiaries, engages in the development, ownership, and operation of charitable bingo halls in the United States. As of December 31, 2004, it operated 30 charitable bingo halls, including 16 in Texas, 3 in Alabama, and 11 in South Carolina. It also engages in the party rental business, catering, and installation of tents for events, parties, weddings, festivals, as well as event planning.

The MicroCap Speculator alerted its customers on March 21, 2006 that it was recommending Littlefield Corp. at $0.85 per share. On March 28, the stock was up 35.26% and hit in intraday high of $1.30 per share.

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Minera Andes (MNEAF) hits a 5 year high!

2006-03-06T16:16:00.000-05:00

Minera Andes (MNEAF) is an equity that we recommended for purchase on 1/17/2006 at $0.64 per share. At the end of today's trading it closed at a 5 year high of $0.94 per share. The stock has risen 46% since our recommendation.

To see our original alert that was sent to our subscribers on January 17, 2006. Click on this link...MNEAF Alert

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Avoid Reverse Stock Splits

2006-02-28T10:16:00.000-05:00

When we are looking for a penny stock to invest in we have a list of criteria to follow, one of them is to avoid stocks that have recently undergone a reverse stock split or are planning on doing a reverse stock split. There are a number of reasons why a company conducts a reverse stock split, such as: attract more institutional investors, reduce expenses by "shaking out" the individual investor and to avoid de-listing. The latter, being the most common reason.

There have been numerous studies conducted on reverse stock splits and with stock that trade on the OTCBB and NASDAQ there is an overwhelming negative price impact. To learn more about reverse stock splits, click here.

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Recap of Recommendations from December 2005

2006-02-27T10:32:00.000-05:00

We are very proud to announce that our picks from 2005 were outstanding by anyone’s standard. The one thing that sticks out to us is that we managed to have this track record by picking stocks in many different sectors. Listed below are two oil stocks, they are: Tengasco Inc. and Clickable Enterprises. We also recommended Linux Gold Corp and gold mining company. We also recommended Breakwater Resources Ltd. natural resource company that mines zinc and copper. Lastly, we recommended the internet service provider SiteStar Corp. Please click on the links to see our original recommendation and why we made the recommendations.

Date Purchased	Symbol	Purchase Price	Current Price	% Gain	High Price	High Price % Increase
12/1/2005	TGC	$0.42	$0.75	78.57%	$0.74	123.80%
12/7/2005	CKEI	$0.022	$0.036	63.63%	$0.07	218.18%
12/14/2005	LNXGF	$0.24	$0.40	66.66%	$0.55	129.16%
12/21/2005	BWLRF	$0.47	$0.88	87.23%	$1.08	129.78%
12/29/2005	SYTE	$0.055	$0.071	29.09%	$0.08	45.65%
TOTAL GAIN				65.03%		129.31%

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Disclaimer: We have NOT been compensated in any form by the companies above or any third parties representing them. Additionally, we do NOT own shares in any of the stocks above. We are a completely non-biased service.

We Were Interviewed on Fundadvice!

2006-02-25T07:43:00.000-05:00

The founder and President of The MicroCap Speculator, Jim Murray, was interviewed on the radio show, Sound Investing (Fundadvice.com) with Paul Merriman. Please tune in and give it a listen as Jim shares his passion for penny stocks. Our interview is approximately 29 minutes into the program.

Click here for the interview!

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How Do You Successfully Invest in Penny Stocks?

2006-02-24T11:17:00.000-05:00

Hey, I have a hot stock tip for you…It is a can’t miss, it is in energy and everyone is always looking to lower their monthly utility bill, especially with the high cost of oil. The company has $8 million in assets and for the last nine months the company has earned $2.7 million in revenue. They are a generator and wholesaler of electric power to electric utilities serving the retail electric market. The Company currently owns and operates a 38-megawatt co-generation facility in North Carolina, which has governmental permits to burn a variety of fuels. They are also an established company and have operated since 1986. The best part, the stock only costs $0.03 per share. Call your broker and get on this one quick before it doubles or triples and you lose out!”

We have all heard or received e-mails like the scenario above and unfortunately many of us have purchased stocks on a flier or trusted what was being sent to us or told to us – only to lose our money. The scenario above is a real company, however if you conducted due diligence on them you would learn that they are losing $0.21 per share, have defaulted on a bank loan and are late filing financial documents with the SEC. Clearly, a stock one should not be purchasing. However, not all penny stocks are like the scenario above, many are good, small companies that are profitable and looking to attract investors – the trick is to find them. In this article, I hope to educate you on the steps you can take to reduce your risk when investing in penny stocks.

The first question that needs to be answered is…what is a penny stock? On the surface it appears to be a simple question, with a simple answer…stocks that trade for a penny. However, there is not a definition that is adhered to by all. The Securities and Exchange Commission (SEC), in April 1992, defined penny stocks as shares of any company that trades for less than $5. This would make, such well-known stocks as Sun Microsystems, JDS Uniphase, Nortel, Lucent and Sirrus Satellite Radio all penny stocks, since they all trade below $5, even though all have a market capitalization in the billions! Additionally, the definition includes any stock that is not traded on a national securities exchange or quoted in the NASDAQ list maintained by the National Association of Securities Dealers (NASD). By this definition, companies such as Nestle, which trades at $57 per share, would be considered a penny stock, because it trades on the pink sheets as an American Depository Receipt (ADR). Furthermore, when the SEC discusses microcap stocks, a term often used interchangeably with penny stocks, it isn’t much clearer. It states that the term "microcap stock" applies to companies with low capitalization, meaning the total value of the company's stock. Microcap companies typically have limited assets. For example, in cases where the SEC suspended trading in microcap stocks, the average company had only $6 million in net tangible assets — and nearly half had less than $1.25 million. Microcap stocks tend to be low priced and trade in low volumes. Again, it there is no accepted definition, for this article we will define a penny stock as any stock that trades under $1, regardless of market capitalization on any exchange (e.g., NYSE, AMEX, NASDAQ, OTCBB and the pink sheets.

There are a number of reasons why individuals invest in penny stocks; many like myself do it as a hobby, there are others that allocate a small percentage of their portfolio to invest in penny stocks and there are those that do it in the hopes of getting rich. If you fall into the latter category, you are probably better off going to your local horse track and put all your money on the horse with the jockey whose is wearing red silks, you have a better chance of getting rich doing that. Penny stocks are inherently high-risk propositions, so be wary of penny stocks. The chances of huge profits are outweighed by even larger chances of losing all of your money.

Once you have decided to invest or trade in penny stocks the fist step in your due diligence process should be to determine what exchange the stock is being traded on. Using a very broad definition, penny stocks can be put into two categories, they are: small/new/growing companies, such as Firearms Training Systems (OTCBB: FATS) and well-established companies on their way down. The most notorious example of a high profile company on its way down is Enron, which amazingly still trades at $0.04 per share on the pink sheets. There are many examples of companies that trade on the NYSE and the NASDAQ whose stock trades at or below a $1.00, these companies should be avoided like the plague, as they are companies in deep trouble. The NYSE and NASDAQ both have requirements regarding stock price, therefore companies trading at those levels, on those exchanges are on the verge of being de-listed. There are two other venues, in the United States, where penny stocks are traded; they are the Over the Counter Bulletin Board (OTCBB) and the “pinksheets”. The main difference between the OTCBB (www.otcbb.com) and the pinksheets is as of July 2000 all OTCBB stocks are required to file financial reports (e.g., quarterly and annual reports) with the SEC. Pinksheets (www.pinksheets.com), called that because of the color of paper the quotes are printed on, are like the Wild West; these companies are NOT required to file with the SEC, although many of them do. There are a variety of companies listed on the pinksheets; there is everything from Mom and Pop operations to large foreign companies that have American Depository Receipts (ADR’s) listed. Since, companies are not required to file documents with the SEC on the pinksheets it becomes extremely difficult to obtain information regarding the financials of the company and when you do find information, you should question there accuracy. Since companies are required to file financial documents on the OTCBB, it is recommended that your penny stock picks be limited to those listings.

TIP: Find a stock that is traded on the OTCBB.

Step two on your due diligence checklist should be: What is the company’s ticker symbol? Stocks that are traded on the OTCBB usually have four characters; however many times you will notice stocks with a fifth character in their symbol (see chart below). Symbols with five characters are not an inherently bad thing, however, there are a two fifth character symbols that should be major red flags when selecting a stock, and they are the symbols E and Q. A ticker symbol with a fifth character of “E” (e.g. WXYZE) indicates the company is late filing their required reports with the Securities and Exchange Commission (SEC). This should tell you the company is run poorly, as filing with the SEC is important and should be a priority if the company is serious about attracting investors. Additionally, there is a good likelihood the company is experiencing financial problems. It should be noted that once the company files the required documents the E is dropped from the stock symbol. The other symbol that is a major red flag is Q. Any company with a fifth character of a Q in their symbol (e.g., WXYZQ) is in bankruptcy. While there are examples of companies emerging from bankruptcy and the stock doing well, it isn’t normally the case. Take a look at many of the dot com stocks that ended up going bankrupt. Many didn’t emerge or their stock became worthless.

TIP: Don’t invest in companies whose symbol ends in E or Q.

Now you have determined that the stock is traded on the OTCBB, is current with their financial statements and not in bankruptcy – a good start. It is now time to start delving into the nuts and bolts of the company. The best way to do this is to start reading the latest quarterly report. You can find quarterly reports via Yahoo! Finance on Edgar-Online.com. Your first stop in the report should be to determine if the company has a “going concern” statement in their report. An independant auditor that basically states there are reasons to believe that the company is not going to be able to maintain itself as a viable business writes a going concern statement. It will read like: “The report of independent auditors on the Company's December 31, 2003 consolidated financial statements includes an explanatory paragraph indicating there is substantial doubt about the Company's ability to continue as a going concern.”

TIP: Don’t invest in companies who have a going concern clause in their financial statements.

So, you have determined that they aren’t going to close their doors in the next few days; the next step is to start figuring out what the company does. My recommendation is to stick to companies you understand. For example, when I read quarterly reports of pharmaceutical and genetic stocks, they make no sense to me because I don’t understand the science of the company to know if what I am reading is good, bad or indifferent, so I never invest in those companies. In the annual or quarterly report you should read the profile of the company. This is management’s description of what the company does, its mission, what products they sell or service and what subsidiaries they have. This type of information is normally listed in the Managements’ Discussion of Operations. When reading the profile keep in mind that most successful companies focus on one type of business, such as PC’s, clothing retail, wireless access, etc. However, it is common in penny stocks to find companies that have revenue streams from two or more, very different sources. For example, the company Ad South Partners (OTCBB: ADPR) is the combination of beauty products company and an advertising agency. Their primary revenue stream is an advertising agency; however they also market various facial and skin creams. While both may be a good idea and be profitable, rarely does an entire management team have expertise in advertising and beauty products.

TIP: Look for a company that does one thing and does it well.
TIP: Stick with companies whose business practice you understand.

The next topic is the subject of books, however for this article we are going to condense the financial statements down to looking at one number, earnings per share. With any stock, not just penny stocks the purpose of being in business is to make money, so try to invest/trade in companies that are profitable. There are many financial stock screeners on the Internet that can be used to find profitable penny stocks. There is a good one on www.smallcapcenter.com

TIP: Pick a company that is profitable, there are plenty of profitable penny stocks.

A valuable source of information regarding companies are the news stories and press releases that are sent out. Take a look at Yahoo! or smallcapcenter.com to get a list of the recent news releases, read them all. In doing so, you will start to get a sense if the company is flourishing or if the company is struggling. Press releases also keep the stock on the “radar scope” of many investors. Also, look out for any red flags, such as the SEC sending a formal order to conduct an investigation on the company. While not a penny stock, a good example of the carnage that occurs when the SEC comes knocking on the door is Krispy Kreme doughnuts. The stock lost approximately 40% of its value once the SEC investigation became public information. TIP: Pick a company that generates some press, it is likely to have more trading activity.

TIP: Don’t invest/trade in a stock that is being investigated by the SEC.

When reading the Company’s news releases and their SEC filings, be wary of companies that have approved reverse stock splits. Companies generally conduct a reverse split to increase the share price to make the equity more appealing to investors and institutions. An example of a 1:10 reverse stock split would be if you owned 1000 shares of a $0.50 stock, you would need to trade in all 1000 and would get 100 shares in exchange that would now be worth $5 each. While there are legitimate reasons to conduct a forward split (e.g., get rid of small shareholders that are an administrative expense), but normally it is an act to artificially pump up the price of a stock whose share price is low.

TIP: Don’t invest/trade in a company that is planning to conduct a reverse stock split.

Many penny stock companies hire investor relation firms to recommend the company stock to various media avenues. So, very often if you search the Internet for a particular company you will stumble upon a research/recommendation report written by an investor relations firm (samples can be found on ceocast.com, under the research tab). While many of these reports do provide excellent information, their recommendation must be taken lightly. Generally, these companies receive large amounts of shares in exchange for the research report. Companies are required by law to disclose if they received shares. This information can be found in the disclaimer at the end of the research report. An example is:

“The Buy our Stock Service is a registered investment advisor that produces equity research reports. On September 24, 2004, in consideration for Buy our Stock Service equity research services, including this report, the Company agreed to pay Buy or Stock Service a fee of 500,000 shares of the Company's common stock.”

Obviously, if you see a disclaimer like the one above you need to concern yourself with how objective the report really is. Again, this is why doing your own due diligence is key.

TIP: Be extremely wary of research reports when the firm was paid either in cash or stock.

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