Little Drummer Boy

We’ve heard a lot of drumbeating for big promotions lately. But really, when it comes down to it, few of us can afford to put enough money into the big stocks… at least not enough to make a difference.

Additionally, large cap stocks don’t give penny stock investors the returns they’re looking for. Most confident investors are happy with a 5% to 7% return. Penny stock investors are not.

So while Wall Street’s large-cap stocks helped push the Dow Industrial into record territory, it’s important to remember that since the start of the year, small-caps have held their ground.

Take a look at small-cap stocks in 2006. The Russell 2000 index of small-cap stocks is up 16% this year. The most popular Penny Stock Index, which is on Davren Penny Stocks, is up 9.26% since the beginning of November.

Of course, smaller companies by definition grow faster than larger ones. And with those sharp revenue numbers comes more risk. For many small companies, all it takes is the exit of one major shareholder to wreak havoc on the stock price.

Small-cap stocks present a unique risk that is often overlooked by many traders and investors. These lesser-known plays can scale up under the right conditions because there is less stock in the market to sell. But they can also come crashing down quickly after weak earnings or contrary news that undermines their success story.

However, the market continues its love for small caps, especially stocks of undervalued small companies; affectionately called “precious stocks”.

Growth investors are the first in line to buy shares of any new company. They pay high prices for companies that promise huge growth. Value investors look for bargains among stocks beaten and discarded by other investors, or simply because they aren’t the flavor of the month… or the hour.

Although the line between penny stocks and small caps has narrowed over the past few years, value stocks continue to kill growth stocks — just as they have since the tech bubble burst in the early 2000s.

Large-cap growth stocks had a mediocre year, gaining just over 7% in 2006. That compares to a dismal 26% for large-cap stocks.

Think you missed your chance on some untapped value promotions? If there is one thing you must remember with the stock market, history will always repeat itself.

Just as the market turned in 2000, it will turn again. As one analyst noted, “small caps are nowhere near as overvalued as tech stocks were when they finally collapsed. Large-cap stocks are also not as cheap today as small-cap stocks were in 2000.”

So what do you do as a penny investor? Do you invest most of your money in the cheapest part of the market and wait patiently in line? Or do you dig into what has worked lately and hope it continues?

It’s a really tough challenge. Penny stocks are more volatile than their larger counterparts. And as we all know, penny stocks can defy the odds; up when the market is falling and down when the market is rising.

Maybe you could just sit down for a short time. Market watchers expect small-cap stocks to turn bright in January as investors shed old winners and make room for more speculative issues.

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