Thursday, April 30, 2009

Penny Stocks are No More Riskier than GOOG

Penny stocks have a bad rep. It's very similar to how people give motorcycles a bad rep. The reckless shirtless riders ruin it for the rest that ride responsibly and safely. Traders and penny stock pump and dumpers certainly have ruined it for the majority.

Just until about 6 months ago, I steered well clear of penny stocks. I viewed it as risky, gambling and plain evil. But that has changed. I finally got rid of that misconception.

The penny stocks I am referring to are the companies that lie in net net territory, plenty of assets and cash from operations to support the business. These penny stocks have fallen so much in price that there downside is very limited. Take iGo Inc (IGOI) for example, their current share price is $0.62 but it has $0.97 in liquid assets even after subtracting total liabilities. When IGOI announced that their biggest customer accounting for 42% of revenue canceled their contract, how much did the stock fall? It fell 0%. That's right. The stock price did not budge. Quite a contrast to other Wall Street darlings that miss earnings by 1c followed by the stock cratering down 20-30%.

The small and microcap universe is not risky. It is just misunderstood. If you apply the same fundamental analysis, these penny stocks are no more risky than buying any other stock. In fact, buying GOOG at $700 and AMZN at $90 was one of the riskiest things you could have done.

Disclosure

I own shares of IGOI


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