The Smart Way To Make Money In Penny Stocks In 2014 And Beyond
With 2013 now officially in the books, it’s time to start looking ahead to what’s in store for penny stocks in 2014. But in order to do that, we must first understand what happened in the year that just ended.
No question about it, 2013 was an outstanding year for stocks of all shapes and sizes, but it was especially great for small-caps and penny stocks.
Look no further than the Russell 2000 index for evidence of how great a year 2013 turned out to be. The small-cap stock benchmark finished the year at an all-time high closing price of 1,163.64 for a whopping 37% annual gain.
What’s more, the Russell outperformed the two major large-cap stock indices, both of which registered their own stellar gains for the year.
The Dow Jones Industrials finished 2013 with a rise of 26.5%, the best calendar year performance the 117-year old index has had since 1995. And the S&P 500 index, the standard benchmark for large-cap stock fund managers, increased by 29.6% for its highest annual return in 16 years.
Like I said, 2013 was clearly a banner year for the stock market overall. But it’s also patently obvious that small-cap stocks and penny stocks were the place to be.
The question now is… will these mighty mites add to last year’s gains in 2014?
The short answer to this question is yes and no. Yes, I believe a good number of small-caps and penny stocks will post big gains in 2014, but I don’t think we will see them rise across the board like last year.
The main reason I expect small stocks to perform well in 2014 is a strengthening US economy.
Most economic forecasts I’ve seen are projecting GDP growth of 3% or better for the year. That would be a significant increase from last year’s growth rate of right around 2%.
This is key because a strengthening economy tends to have a bigger positive impact on smaller companies compared to larger ones. In fact, Goldman Sachs estimates 2014 earnings growth of 23% for Russell 2000 companies versus just 8% for those in the S&P 500.
Of course, nothing drives stock prices like rising earnings.
With that said, I doubt we’ll see a repeat of the rising tide lifting all boats like we saw in 2013. The reason being… valuations for many small caps and penny stocks have risen to extreme highs.
Goldman Sachs recently pointed out that the P/E for the Russell 2000 now stands above 10-year averages both in absolute terms and relative to the S&P 500. And the price-to-book ratio for these stocks has increased “from a standard deviation below to nearly a standard deviation above average levels during the last two years.”
In other words, 2014 is shaping up to be a stock picker’s market in the small-cap and penny stock space.
I believe it will be much more difficult to find winning small-caps and penny stocks this year compared to last. You won’t be able to buy stock in just any old small company and wait for the profits to roll in. And if you unwittingly buy an overvalued penny stock you run the risk of incurring a huge loss if the stock comes plunging back to earth.
To be successful in 2014, investors will have to spend a lot more time and effort on research and due diligence.
Now, if that doesn’t sound like something you have the time, expertise, or inclination to undertake, I have the perfect solution for you. Take out a quarterly subscription to my investment newsletter… Penny Stock All-Stars. Click here for more information.
This unique monthly publication focuses on penny stocks that I believe are destined to become the “next big things” in their respective industries. By investing in these companies while they’re still small, you have an opportunity to capture enormous gains when they grow from small-cap to mid-cap to large cap companies.
But that doesn’t mean we employ a strict buy-and-hold strategy. In fact, we booked several triple-digit winners last year. Subscribers who followed our recommendations easily made enough money to cover the cost of their subscriptions for years to come.
Bottom line…
After last year’s huge gains, it’s going to be a lot tougher to make money in small caps and penny stocks in the coming year. The smart way to play this area of the market is to find a reputable source of penny stock research and analysis that you can depend on like Penny Stock All-Stars.
Profitably Yours,
Robert Morris
Category: Investing in Penny Stocks
