I just found three penny stocks with huge
upside potential.
One is already up 43% but could double and
another is trading for less than it’s break-up-value.
I’ll show you how I find penny stocks and
reveal the three best stocks to buy right
now.
We’re talking best penny stocks to buy today
on Let’s Talk Money.
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Joseph Hogue with the Let’s Talk Money channel
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We haven’t talked much about penny stocks
on the channel but it’s an investment with
huge upside if you’re ready to take the
risk.
In fact, a stock I recommended in July last
year is already up over 174% in the last eight
months.
In this video, I’m going to take you through
exactly what I look for to find the best penny
stocks from the stock screen to the deep research.
I’ll then reveal three penny stocks I’ve
been watching that could be your best investments
of the year.
I do want to warn you though, like I said,
penny stocks and micro-cap stocks are extremely
risky.
You can lose everything just as easy as see
that two- or three-times return on your investment.
Because of that, I wouldn’t recommend having
more than maybe 10% of your portfolio in these
stocks.
This is why I’m starting the video off with
the process I use to find penny stocks.
It’s not enough to just drop a few stock
picks.
I want you to be ready with the knowledge
of how to find these opportunities and be
able to avoid the risks.
Penny stocks can offer some great opportunities
though because they’re not widely covered
by analysts like the Amazons or the Apples
in the market.
There are 41 analysts covering Amazon.
That’s 41 Wall Street analysts spending
their nights and weekends digging into the
financials, calling contacts and suppliers.
There just isn’t that much new to be discovered.
In fact, the average earnings surprise for
stocks in that large-cap S&P 500 is just 3.5%.
That means analysts are off by less than four
percent predicting the profits of these companies.
Compare that to an average surprise of 11%
on penny stocks and it’s clear there is
just more opportunity in these smaller companies.
Looking for penny stocks, I’ll usually start
with a basic screen to narrow the list.
Now I’m using Morningstar but just about
any online investing platform will have a
screener you can customize.
I’ll start by filtering for stocks with
under $750 million in market cap.
This might not seem like a penny stock company
but it’s extremely small when you consider
the average market cap in the S&P 500 is $229
billion.
Then I’ll filter by revenue growth and operating
income.
First, I like to see that the company is growing
sales but more importantly I want to see that
it’s growing its operating income faster.
So maybe I’ll put in revenue growth greater
than or equal to 5% and then greater than
or equal to 10% when I filter for operating
income growth.
Since operating income is the sales minus
cost of goods and minus all those operating
expenses, if the operating income is growing
faster than sales growth, it means the company
is also cutting some of those costs.
That means it’s getting more profitable,
more efficient, even as it’s growing sales
and that’s a great sign for these smaller
companies.
One last thing I’ll screen for is cash flow
from operations.
Most investors get hung up on earnings, it’s
what everyone talks about and everything you
see is about earnings.
What’s more important though, and this is
what professional analysts look at, is cash
flow from operations.
You see, there are all kinds of ways a company’s
management can manipulate earnings or profits.
They can delay some expenses or book some
sales early, anything to make the earnings
look higher than expected.
It’s all accounting gimmicks on the income
statement.
Now the statement of cash flows, that’s
actual cash coming in and out of the company,
and it’s much harder to stick lipstick on
this pig.
If a company isn’t doing well but is using
all kinds of accounting shenanigans to make
itself look profitable, you’ll find it in
the statement of cash flows.
So I’m back in the screener, I scroll down
to cash flows and I’ll just filter for companies
with cash flow from operations in the most
recent year that are higher than the previous
year.
This tells me the company is growing actual
cash from the business year over year.
I can also carry this back further like filtering
for higher cash flow in year two over year
three but we’ll just keep the one filter
for this example.
Now that simple stock screen still left us
with over 140 potential penny stocks so I
would probably play around with the filters
until I got it down to 30 or 50 stocks.
Then I would go on to my fundamental and catalyst
analysis.
We won’t get too far into that fundamental
analysis or the catalysts I look for because
I want to get to those three penny stocks
I found while researching for the video.
If you want me to make a video detailing my
fundamental analysis or other ways to pick
stocks, let me know in the comments below
the video.
Basically, fundamental analysis is looking
deeper into those cash flows and other financial
statements.
It’s looking at the industry in which the
company operates and what advantages it has
over competitors.
For example, in fundamental analysis, I’ll
first look to make sure cash flow from operations
and net income are growing at around the same
rate each year.
This is an old school analyst trick to seeing
if company management is trying to play shenanigans
with the income statement.
Net income growing at a slightly faster rate
than cash flow, as in the case of Apple here,
might not be an alarm but it does signal some
accounting tricks by management to make the
profits look better than they might actually
be.
If net income or earnings are growing much
faster than actual cash flow, it’s a warning
sign that something is fishy in the accounting.
Beyond looking at the financial statements,
I’ll also look at some of the valuation
measures like price-to-earnings or price-to-sales.
One important warning here and we’ve talked
about this before on the channel is that when
you’re comparing stocks, you absolutely
have to compare stocks within the same industry.
It does no good to compare a price-to-earnings
ratio of a tech stock against the ratio on
a bank or a telecom stock.
Industries have different characteristics
like growth and debt so you have to be comparing
apples-to-apples.
You want to find the best of breed within
each industry, don’t try to find the very
best stock across every industry.
Finally here before getting to those three
penny stocks is I’ll just look for a general
catalyst, an event that could move the shares
big time.
Whether this is the potential for a takeover
or a big project to be announced or just a
change in the overall supply/demand picture.
You’ll find solid companies and stocks with
what we’ve covered to this point and they’ll
be good long-term investments.
Finding that near-term catalyst though just
means you’ve got a better chance at seeing
a quick return rather than waiting.
Using this filter and analysis, I’ve narrowed
the list to three of the best penny stocks
to buy now.
Strong companies trading for under $1 per
share or under $750 million market cap that
could be about to take off.
Our first penny stock is Eldorado Gold, ticker
EGO, a $690 million gold miner with 11 major
projects around the world.
Eldorado has assets in Canada and Brazil but
the majority of mining is being done in Eastern
Europe, Turkey and Greece.
Management recently reported its 2018 performance,
producing 350,000 ounces at an operating cost
of $650 per ounce and an all-in-sustaining
cost of $994 last year.
They guided up to 420,000 ounces this year
and up to 550,000 next year.
Not only is production expected to boom as
much as 57% over the two years but costs are
expected to come down at least 10% to an all-in
sustaining cost of $800 to $900 an ounce this
year.
So you’ve got a good medium-term picture
on the shares and they’re up 43% so far
this year but the stock still trades for a
price of about a fifth its book value.
That’s about an eight of the 1.73 average
price-to-book value for other miners.
The big overhang for Eldorado is its Skouries
project in Greece which has been constantly
delayed on permitting by the government.
The company has won a couple of arbitration
agreements and the government is supposed
to be getting out of the way so if the company
can get that worked out, it could mean a big
jump in the shares.
That’s our first stock and I’ve been following
this one for a while.
If you want to see more videos like this one
or if you’re enjoying this one, tap that
thumbs up button under the video to let me
know.
Our next penny stock is Precision Drilling
(PDS), a $724 million leader in North America
oil and gas production.
The company reported an excellent fourth quarter
with revenue 12% higher as well as profitability
gains.
Drilling in the U.S. increased 15% with the
company reporting a 5% increase in rigs versus
an average increase of just 2% for competitors.
Besides the 240 drilling rigs and 210 service
rigs it has in North America, it also has
17 drilling rigs internationally in Saudi
Arabia and Kuwait.
Precision is in just about every major field
development in North America and controls
more than a fifth the land drilling market
in Canada.
The United States passed the Saudis and Russia
last year to become the world’s largest
oil producer.
Sanctions on Iranian and Venezuelan oil will
keep prices higher and could even drive crude
further this year.
Debt has been an overhang on the shares with
almost $1.3 billion in long-term debt on the
balance sheet.
The company has been aggressively paying this
down, retiring more than $330 million in the
last few years, and has no maturities until
2021.
That means a lot of financial flexibility
and an improving debt picture for the next
two years and it could mean catalysts for
the shares.
Our third penny stock is the smallest of the
group and frankly, when I was a full-time
analyst, I wouldn’t even have considered
it.
The big fund managers I worked with needed
to place hundreds of millions in investments
and didn’t have time for these smaller companies.
I love being able to talk about it here on
the channel though because mainstreet investors
can use this as an advantage, getting in on
the companies that fly under Wall Street’s
radar.
Our third penny stock is Amira Nature Foods,
ticker ANFI, a $57 million packaged food leader
in specialty rice.
Rice is the primary staple food for over half
the world’s population with more than 512
metric tons consumed annually.
The industry is extremely fragmented with
the top ten brands controlling less than 13%
of the market so this is an industry with
a lot of room for consolidation and where
bigger players can get an advantage.
ANFI books half its sales within India and
another 44% in emerging Europe and the Middle
East but has a distribution agreement with
Whole Foods and Costco to sell in the U.S.
market.
Amira is an extremely small company but what
put it on my radar is that it’s a net current
asset value stock.
You might remember we talked about the NCAV
in our video covering strategies from the
book The Intelligent Investor.
This is where a company’s current assets,
so just its cash and receivables that can
be converted quickly to cash, are more than
all it’s liabilities both current and long-term.
Basically, it’s a liquidation value of the
company.
That’s $492 million in current assets minus
$294 in total liabilities for Amira so a net
current asset value of almost $200 million.
Now when we compare that to the total value
of the shares traded in the market and a market
cap of just $57 million, you see how there
could be some huge potential value here.
Basically, someone could buy the company for
under $60 million and sell the assets for
two hundred.
That’s something that can bring out big
corporate buyers and it could mean a big jump
in the shares.
There’s a lot of potential in those three
penny stocks but don’t miss those three
investing strategies I shared in our Intelligent
Investor review.
This is the book Warren Buffett called, by
far the best book on investing every written.
I’ll leave a link in the video description
and a card up in the corner of the video.
Also make sure to let me know in the comments
if you want to see those videos on how I pick
stocks from a fundamental analysis perspective.
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