Of late, we’ve heard plenty of drum-pounding for big stocks. But really, when it comes right down to it, few of us can afford to invest enough money in big stocks… at least enough for it to make any difference.
Also, big stocks don’t give penny stock investors the kind of returns they’re looking for. Most staid investors are happy with 5% to 7% returns. Penny stock investors are not.
So, while Wall Streets large cap stocks have helped hoist the Dow Industrial into record territory, it’s important to remember that year-to-date, small caps have held their own.
Look at stocks of small companies in 2006. Russell 2000 index of small-company stocks is up 16% this year. The most popular penny stock index, the Penny Stock Index found at Davren Penny Stocks is up 9.26% since early November.
Of course, smaller companies by definition grow faster than bigger ones. And with those hopped-up earnings numbers comes bigger risk. For many small companies, all it takes is the exit of one big shareholder to wreak havoc on stock price.
Small-cap stocks pose unique risks often not anticipated by many traders and investors. These lesser-known plays can zoom higher under the right conditions because there are fewer tradeable shares in the marketplace. But they can also crash back to earth quickly after weak earnings or contrary news that undermines their success story.
Nevertheless, the market continues its love affair with small caps, particularly stocks of what once were undervalued small companies; affectionately referred to as “Value Stocks”.
Growth investors are first in line to buy shares of any new company. They pay rich prices for companies that promise to generate tremendous growth. Value investors look for bargains among stocks beaten down and discarded by other investors, or simply because they’re not the flavor of the month…or hour.
While the edge between penny stocks and small caps has narrowed over the past few years, value stocks are continuing to swamp growth stocks — just as they have ever since the tech bubble popped in early 2000.
Large-company growth stocks have had a mediocre year, up just a bit more than 7% in 2006. That compares to a torrid 26% for large-cap value stocks.
Think you missed your chance at some untapped value penny stocks? If there’s one thing you should remember, with the stock market, history will always repeat itself.
Just as the market turned in 2000, it will turn again. As one analyst noted, “Small caps are nowhere near as overvalued as tech stocks were when they finally collapsed. Nor are large-cap-growth stocks as cheap today as small-cap-value stocks were in 2000.”
So what do you do as a penny stock investor? Do you put most of your money into the cheapest part of the market and wait patiently for the turn? Or, do you pile into whatever has been working lately and hope it continues?
It’s a tough call really. Penny stocks are more volatile than their larger peers. And as we all know, penny stocks can defy all the odds; going up when the market is down and down when the market is up.
Maybe, you could just sit tight for the short-term. Market-watchers expect small-cap stocks to shine in January as investors clear out old winners and make room for more speculative issues.