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Published: June 19, 2009
When you are about
to invest in a penny stock, the number one question you need to
ask yourself is: What's the catalyst?
Without some big event or monolithic development coming down the
road, there's no reason for investors to care about these tiny
companies.
You see, the majority of investors are only interested in making
5%-10% per year. That's pretty much the maximum you can expect
to gain if you are investing in blue chips. Here at Penny
Sleuth, we view the stock market a little differently.
We want the money multipliers - double-, triple-, even
quadruple-digit gains. For that to happen, we need some kind of
spark to set our penny stocks apart from the rest. After all,
there are currently over 6,000 to choose from.
So, what kind of catalysts can make a penny stock pop? Let's
look at a couple big ones:
* Commercialization - After years of research and
development, and sometimes painstakingly long clinical trials
and efficacy tests, there comes a time in any successful start
up company's life when it needs to actually manufacture and sell
its products or services. Just take a look at what happened to
Tata Motors Ltd. (NYSE: TTM)...
As you might already know, this was the growth story of last
year, and it continues to today. Tata is the Indian car giant
that made its mark on the global economy, when it released the
world's cheapest car.
In March of this year, the company commercialized a new product.
It started selling the Tata Nano in India. Investors were so
excited by this car design, they started buying enormous amounts
of Tata stock. Since the company started pre-selling the car,
shares are up 165%.
* Buyout Candidates - Sometimes, it's as simple as
waiting for a larger competitor to buy the penny stock. When one
company buys another, they agree on a price. Many times, that
price is much higher than what the soon-to-be-purchased
company's share price is currently trading. This gives those
shareholders an instant gain.
A few weeks ago, I discussed the consolidation of the soda
industry. Both PepsiCo Inc. (NYSE: PEP) and Coca-Cola
Co. (NYSE: KO) are buying out their bottling operations to
save on expenses and double spending.
Pepsi is in the process of buying its two largest bottlers:
PepsiAmericas and Pepsi Bottling Group. Shares of both of these
companies popped more than 22% the day it was announced. From
their March lows, PepsiAmericas is up 67% and Pepsi Bottling
Group is up 94%.
* Legal
Battles - The last of the major catalysts is court rulings.
In many cases, a simple ruling can make or break a penny stock.
Hardly any company has been entrenched in the courtroom more
than TiVo Inc. (NASDAQ: TIVO).
We wrote about TiVo back in December 2007. Its revolutionary
digital recording technology is both a huge moneymaker and a
legal nightmare. You see, plenty of other competitors claim
rights to certain TiVo patents.
It takes a tech geek to decipher the differences between most of
its intellectual properties, which isn't usually a prerequisite
for a judge. For the last five years, TiVo has been tied up in
court with its competitor EchoStar Communications Corp, now part
of Dish Network Corp., over a patent dispute. The court finally
ruled in favor of TiVo, rewarding the company $103 million plus
interest.
Upon the day of the ruling, shares of TiVo jumped 53%. This gain
sent TiVo's stock over $11 per share and out of penny stock
land. That just a drop in the bucket of what a lawsuit ruling
can do for a company. Imagine what $103-plus can do for an even
smaller company...
These are just four types of things to consider when thinking
about buying a penny stock. But even if you do have the perfect
catalyst lined up, that's only the beginning...
Sincerely,
-- Jim Nelson
Editor
Penny Sleuth
P.S.: Penny Stocks can be some of the most lucrative investments
on the market. But you need a plan in order to succeed...That's
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