Stock splits change the value of a company by issuing more shares. Looking back at previous stock prices that have had stock splits are deceiving. If a company is worth 100 million it might sell a million shares of stock at $100. If the stock price rises to $200 the market cap will be worth $200 million, and the company will still have a million shares of stock out there. But say a company is concerned that people will be afraid of owning a stock over $100 and want to make their shares available and affordable to the retail investor. They can simply double the amount of shares, give everyone who owns stock twice as much, and cut the value of there stock in half. The stocks that go up thousands of percent tend to do this multiple times. This gives the appearance of a stock being worth only pennies when people first bought it, but is usually not the case. Generally the only way a stock can be worth pennies is if it drops from $20 per share or so and loses over 95% of it’s value. There’s usually a good reason for that, and usually the company is on the verge of bankruptcy if it’s not already there. For every story you hear about a company bouncing back, there are thousands of others that won’t make it.
So if you want a high risk high reward, and you want to risk a small amount of money to make a lot, hoping to strike it big are penny stocks an option?
In some ways they are. Penny stocks generally will represent small market cap companies. For example, a company that is worth 100 million dollars is generally a small cap company. However, if they sell for $1 and issue 100 million shares, 10 cents and order 1 billion shares, or $1000 and order 100,000 shares doesn’t really effect the quality of the company, or the probability of it going up or down. For this reason, you should generally look for small cap stocks if you are looking for that type of reward. However, if you are so inclined, there may be a few penny stocks worth investing in.
When checking for companies with 5 years worth of previous earnings growth and future expected earnings growth there are currently 0 stocks available for under $1. However, if you look for companies under 600 million dollars market cap that are trading under $10 there are 14 of them with the same criteria. Since there are no penny stocks available, these represent a good alternative. Don’t worry about the fact that you can buy 1000 shares of a company at $1 for $1000, but for $10 per share you can only buy 100. The total number of shares does not effect the percentage of the company you own when comparing two separate companies, it’s the dollar amount invested over the market cap that determines what percentage you own.
| Company Name | Ticker | Last Close | Long-Term Growth Consensus Est. | 5 Yr. Hist. EPS Growth | Market Cap |
| ACCELRYS INC | ACCL | 7.61 | 27.5 | 26.34 | 421.59 |
| BIOSCRIP INC | BIOS | 4.39 | 20 | 25.75 | 237.67 |
| CLICKSOFTWARE | CKSW | 8.09 | 20 | 82.37 | 244.67 |
| CHINA TRANSINFO | CTFO | 4.88 | 22 | 48.62 | 123.26 |
| GREAT LAKES DRG | GLDD | 7.41 | 20.5 | 103.4 | 433.8 |
| HANWHA SOLARONE | HSOL | 7.54 | 20 | 35.5 | 553.54 |
| HEALTHSTREAM | HSTM | 7.54 | 20 | 23.18 | 164.41 |
| KID BRANDS INC | KID | 7.22 | 25 | 40.01 | 155.57 |
| LIONBRIDGE TECH | LIOX | 3.18 | 20 | 26.13 | 195.82 |
| QUANTUM CP-DSSG | QTM | 2.55 | 20 | 42.98 | 574.77 |
| SABA SOFTWARE | SABA | 8.91 | 22.5 | 79.1 | 253.22 |
| SHARPS COMPLIAN | SMED | 4.63 | 25 | 90.89 | 69.19 |
| INVENTURE FOODS | SNAK | 3.82 | 20 | 89.14 | 68.87 |
| SUMMER INFANT | SUMR | 7.49 | 28.17 | 27.2 | 116.31 |
This screen is just a starting point. Out of over 2,000 stocks priced under $1, only 67 of them actually even have positive EPS over the last 12 months, and the prior quarter. And of those, only 5 of them have a positive forward P/E suggesting that the company may be likely to maintain positive earnings in the next reported earnings date. This may be due to the lack of coverage penny stocks get, as many may have no data and not be included… However the fact that out of over 2,000 penny stocks, only 5 even have a chance at making the cut should tell you something. A low, but positive P/E suggests that a company tends to earn more than the price gives it credit for. This suggests the company may be undervalued if you don’t consider any other factors. So your only good penny stocks to buy in 2011 are the following names:
| Company Name | Ticker | Last Close | Last Qtr EPS | 12 Mo Trailing EPS | P/E (F1) |
| CHEMBIO DIAGNOS | CEMI | 0.46 | 0.03 | 0.04 | 23 |
| DIVINE SKIN INC | DSKX | 0.455 | N/A | N/A | 15.17 |
| JOES JEANS INC | JOEZ | 0.9599 | 0.01 | 0.04 | 15.16 |
| TUCOWS INC | TCX | 0.85 | 0.02 | 0.04 | 12.14 |
| ZYNEX INC | ZYXI | 0.75 | 0.01 | 0.02 |
8.33
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However, when risk involved, the ideal amount to bet is not so aggressively, but not too conservatively. Betting overly aggressive results in a negative return over time as your downswings will be so great, even consecutive upswings won’t be enough even in a winning trading system to profit. Betting too conservatively lowers your overall wealth return as well. As such knowing how much to risk is a big part to investing with the odds in your favor.
If after reading this article, you decide that penny stocks are not right for you and you are looking for alternative investments in 2011, there are many good stock investments for 2011 to chose from.