Stock picks are always for value investing, because stock pickers are no traders. Wrong!
The stock picker is no prophet. He doesn’t know the future of a stock better than anybody else. What he tries to gauge is the potential of a stock. But whether its future lives up to its theoretical price potential or not is pure statistics. That’s why it pays off to trade all stock picks.
Trading the stock after having it thoroughly selected means igniting the afterburner. Picking a stock should generally be accompanied by trading it. But there are various styles of stock picking and true exceptions…
Value investing without any or sophisticated trading is appropriate if trading something is difficult or futile. If a market trades discontinuously, trading doesn’t work, simply because it is impossible to enter and exit the market arbitrarily. Moreover, prices tend to slide or spike for no apparent reason. Under such circumstances technical analysis becomes questionable.
If trading is impossible or hindered, the name of the game must be investing. That means buying cheap and selling higher. But you would want to do it nonetheless when chances are good that the price is rising directly after the buy. Every investor is a trader in his subconscious!
A fine solution to value investing without real trading but with timing the entry offers the small cap stock market. There is no need to trade such stock picks. In the same way the undervaluation gets gently noticed, the buying of such a stock is just done immediately. Simple, almost simplistic. There are no sophisticated entry setups or trading rules necessary.
What is it then that has to be looked for? Some sort of fundamental data mark or trading signal has to be there, otherwise no one could find this undervalued gem.
The answer is statistics. In a market where liquidity for a given stock dries out when it goes down, prices may fall terribly and to unwarranted levels. The stock implodes literally. Small cap stock markets offer hundreds of sleeping ten-baggers. Stocks that disappointed at some point and got forgotten then. Prices are slowly meandering to point zero and may build up a huge potential, which is almost hidden as fundamental data are hard to find and to interpret.
Still, some sort of fundamental judgment could and should be done. But for one, by someone who is an expert for penny stocks and then after a signal occurred.
A trading signal for the stock picking value investor?
This signal is simply an exploding trading volume and a spiking price. The stock shows renewed interest. Important is for the statistical value investor that at this point the reason for the interest is secondary. That’s statistics. In other words, even if the occasional pump and dump scheme is at work, it doesn’t matter!
For one, the stock is still cheap. Even with a stock pumping machine inflating the price it has the potential for a quick gain in it. Secondly trading is a statistical game. Always, but especially so if you are trying to make it being one.
Stocks that had seen much higher prices always have the potential to go back there. People trade them like this, and thus the price potential becomes reality, even if the fundamentals tell a different tale.
There is another reason why our statistical investor has an advantage. If there is a chance for a tenfold rise or more, and on the other side only a loss of the ante is possible, math is on his side. Stocks fluctuate and there is no reason why all your buys immediately should go south. It is the same with flipping a coin. You should not expect to lose ten out of ten.
So, trading penny stocks can be a breeze. Identify situations with much higher prices in the past and newly sparked interest. Prices are still cheap but trading volume shows that something is going on there.
What about fundamentals? Of course, it would be good to know about them, but that’s the challenge with small stocks. It is difficult to find out something for sure. Mostly there is not a single analyst following the stock, unless it once was a large cap stock that crashed fulminantly.
Putting all things together we arrive at a stock picking service with someone who is an expert interpreting the thinly available data. That’s better than nothing. Mostly this strategy is about statistics. Fundamental hints are only the icing cap. Trust is more important. You don’t want to get trapped by a penny stock pumping boiler room.
So, here is it. Our recommendation for penny stock picks using five different setups for identifying strongly undervalued situations. Common to them is the huge potential and that’s what the statistical value investor is looking for.
Don’t expect these stock picks to deliver a sensational win-to-lose ratio. They have explicitly a neutral or worse hit rate. But some smaller losses are washed away by one big hammer. That’s statistical value investing.