The podcast discusses the potential of penny stocks for small investors, highlighting their limited coverage and potential mispriced companies. It covers the concepts of pink sheet stocks and how to find them using scanning tools, as well as the challenges of listing a company on the NYSE. The episode also explores analyzing financial statements, investing in small companies in the medical devices and pharma industries, and the challenges and limitations of buying penny stocks and accessing exceptional companies.
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Quick takeaways
Penny stocks offer potential for significant returns due to lack of coverage, but come with high risk.
To determine the value of a penny stock, calculate the cap rate based on owner earnings.
Deep dives
Understanding Penny Stocks and Their Potential for Newbie Investors
Penny stocks, which are not listed on major exchanges, offer the potential for significant returns due to their lack of coverage by professional analysts. These companies, often traded on the pink sheets, have lower trading volume and limited information available, making them more prone to mispricing. While they can be risky and volatile, penny stocks can provide opportunities for small investors to make substantial gains with a limited investment.
Exploring the Pink Sheets and Finding Potential Penny Stocks
The pink sheets, also known as the over-the-counter market, is a platform where penny stocks are traded. Investors can find pink sheet stocks by using scanning tools or reaching out to their brokerage for listings. One example mentioned is VASO, a company with a market value of around $53 million and a stock price of 31 cents per share. Further research is needed to determine if a penny stock is a good investment, including analyzing financial statements and evaluating cash flow.
Analyzing Owner Earnings and Valuation of Penny Stocks
To assess the value of a penny stock, investors can calculate the cap rate based on owner earnings. Using the example of VASO Corporation, if their owner earnings are approximately $7.5 million, the company's market valuation of $53 million represents a 14% cap rate. This suggests that the stock may be undervalued and potentially on sale. However, conducting thorough research on the company's stability, industry prospects, and long-term growth potential is essential before making an investment decision.
The abundance of unlisted companies available to buy into is a complicated resource for investors. One one hand, the opportunity that comes from smaller stocks being overlooked could lead to incredible results from unlikely sources, but the potential for staggering losses is equally high in this volatile market.
For those willing to dig into the thousands of pink sheet stocks and do the necessary due diligence, the penny stock market can be a gold mine of prospective businesses that don’t get attention from the vast majority of investors. However, this entirely hinges on avoiding the countless scams and schemes that plague these unlisted stocks.
This week, Phil and Danielle return once again to the topic of pink sheet stocks and why they may or may not be worth your time and attention as a value investor.
If you’re in the early stages of your investing journey, don’t miss out on your free copy of The Complete Guide to Investing for Beginners:https://bit.ly/3MBzewf