How Outsiders Can Invest Like Insiders

| April 19, 2016

insidersThe best reason to invest in penny stocks is that they are tough to measure by computerized methods like algorithms, stochastics, MACD, and RSI.  They are even tougher to evaluate by P/E, price-to-book, price earnings growth, and so on.  When money is made in penny stocks, it is more the result of making good decisions based on price and volume and sound money management.  This simplifies the amount of data an investor has to sift through.  Plus, it requires the investor to operate with a high degree of discipline.

While it sounds a little dull just looking at stock charts to find a penny stock worth investment dollars, it can be very rewarding.  Measures like earnings, price-to-sales, and the like are subject to lot of factors that can give a false impression of how well a company is doing.  And even if they were dead-on accurate and free of manipulation, they would be several months old… so again, it would not be a timely indication of a company’s health.  Price and volume on the other hand are readily available every day and give clues to whether savvy investors think the stock is moving higher or lower.

A good place to start is with huge, one-day increases in volume where a stock goes from trading five thousand shares a day on average to three million in one session.  Think of these days as a stamp of approval.  Someone, somewhere knew something the rest of us did not and made a gigantic one day share purchase.  When this happens, good things are coming even though the price of the stock may drift sideways or even lower for weeks.  It is not unusual to see the stock price double within 6 to 12 months after a day of gigantic volume.

Take a look at Sarepta Thereapeutics (SRPT).  Most days it trades a couple million shares, but every time the volume surges over 20 million shares per day, the stock price soon moves higher.  Another example is Kaminak Gold (KMKGF).  Until recently, it traded about 10,000 shares per day, but on two separate days in September 2015 and December 2015, the volume ballooned to 400,000 per day.  If you had bought KMKGF on either day, you would have a double by now.  No amount of computer-based quantitative analysis can give this kind of signal on small-cap, thinly traded, hard-to-value stocks.  But then again, that is the magic of trading penny stocks.  With penny stocks, it is easy to see the actions and results of other investors.

Yet, it is not as simple as just setting up a stock screener to beep every time a stock has unusually high volume and then placing a trade.  Some measure of research needs to be done like how long has it been in business?  Is there a catalyst for it to go higher?  Does the stock have a history of going higher?  How long can it survive on its earnings, cash, and business model?  Once you have confirmed it meets some basic qualifications, then you have a good candidate for making a well-timed trade after a day of heavy volume.


BIO:  Brad Hartung is the editor of the Left Coast Speculator and the blog, Small Cap Pirate, and does not own any shares of SRPT or KMKGF at this time.  You can see more of his stories at:

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Category: Investing in Penny Stocks

About the Author ()

Brad Hartung is the author of The Speculator’s Handbook and the blog, Small Cap Pirate. He specializes in making sound investment decisions in stocks that have the potential to significantly grow in value like biotech and junior resource mining.