All found this article written by Liz Olsen ( at that time the Executive Director of the Stockbrokers Society, LA) in the Penny Stock Journal March/April 89 issue. Thought you would find it interesting. Please be aware that she is talking about markets and companies from 1989.
WHAT TO LOOK FOR IN A PENNY STOCK
It's a truism that among today's penny stocks are tomorrow's big winners, but how do you choose likely winners from among the thousands of issues available? Here, based on 22 years' experience of the Stockbrokers Society, are seven criteria to look for when evaluating penny stocks. The more of these guidelines a stock can meet, the greater promise for appreciation it holds.
A SUFFICIENT NUMBER OF MARKET MAKERS
A sufficient number of MM facilitates narrow margins and high liquidity, and also suggests a widespread faith in the future of the company. Look for at least five preferably 10, houses that make a market in the stock. Ideally, several of these Market Makers would be underwriters of the company's initial public offering, and in any event they should be geographically dispersed.
For example, about 20 firms makes a market for Microsemi Corporation an OTC margin stock whose revenues have risen every year since 1979-and whose high-low stock price during that time has grown from 1 3/4 - 3/8 to 10 3/4 - 10.5
NARROW SPREADS
This is a corollary of factor 1. If there are enough market makers, the buy-sell spread should be relatively narrow. A dozen firms make a market for Electromedics and its stock recently traded at 1 5/16 bid 1 3/8 ask a mere 1/16 spread. But always calculate spreads in percentage terms; a 10% difference be the maximum spread, a difference of 5% or less is far better.
SMALL FLOAT
Look for a stock whose float is relatively limited so that even the mildest of news will have a significant upward impact. In practical terms, this means a stock where insiders control 30% or more of the outstanding shares, such as Medical Imaging Centers of America, whose directors and managers own 37% of the outstanding shares.
A PRODUCT OR SERVICE THAT EXISTS, THAT IS UNIQUE IN SOME IMPORTANT WAY, AND THAT IS BEING DELIVERED TO CUSTOMERS
Sure, biotech stocks and even some leading-edge electronic issues, are sustained in the market on the promise rather than performance. But most successful penny stocks are backed by a real product or service-one that exists, that can be touched or seen or tasted, that is being sold to customers, and that differs in some competitively advantageous fashion from the products and service of competitors.
GROWING REVENUES
Many New York Stock Exchange companies have revenues that grow year after year, as if propelled by natural forces. But when you look at penny stocks, you often see companies whose revenues up and down like the needle on a seismograph during an earthquake. little wonder, then, that a penny stock company whose revenues show steady growth for three years or four stand out.
Take, for example, Micro Bio-Medics, whose revenues have doubled since 1983, rising steadily every year. Such a record, even if not accompanied by growing earnings (or any earnings), suggests a company that is on the right track, a company whose products are accepted in the market, a company that one day will show a record of rising earnings. (In the MBNI's case, earnings have risen every year except one since 1983.)
EXPERIENCED MANAGEMENT
Imagine a young computer company headed by people from IBM, APPLE, or DEC. Or a food company whose senior executives are from P & G, Sara Lee, and General Mills. In the business, as in war and politics , there's just no substitute for experience. Thats why David G. Sadler, Chairman and chief executive of Savin Corporation, was able to change red ink to black, sign anew agreement with a major copier supplier, and enter the facsimile market all within 2 years of taking over this big board penny stock. He brought with him years of experience in tough situations at International Harvester, Massey-Ferguson, White Motor, and other large companies.
BIG - COMPANY AFFILIATION
There can hardly be a better endorsement of a small company than an affiliation with a big company. These so-called strategic alliances are becoming increasingly common place to the benefit of both the big company and its small partner. Savin for example is Ricoh's largest US distributor, a relationship strengthened by a recent new contract.
There are any number of strategic alliances involving penny stock companies. In some instances, big companies manufacture product for distribution by the smaller company. In others, the smaller companies function as R&D centers, developing advanced products for sale by the bigger partners. (Colorocs did this in the color copier market) In still other instances, big companies have significant direct investments in small companies.
A big company affiliation is an obvious endorsement of the penny stock company. It suggests that wise heads have considered the prospects of the small company and found them promising. It also suggests that deep pockets are available to rescue the small company if needed - a suggestion that may be entirely unwarranted, so keep your eye on the financial results and the fine print in the prospectus as well as the affiliations.
If you find a penny stock that qualifies on all seven counts, you've found an unusual company. The fact is the guidelines discussed here are simply that-guidelines that can help you select penny stocks, but that cannot automatically guarantee success. Still these guidelines can be useful in winnowing a list of prospective investments and finding those that appear most promising. After all, you can't invest in all penny stocks, so you might as well buy those that best meet objective criteria.
Liz Olsen is the national executive director of the Stockbrokers Society, Los Angelas, which has 47 chapters nationwide. The stocks mentioned in her article are for illustrative purposes only and are not to be construed as recommendations.
So how many of the 7 do you think Franklin has?
Seth |
