Penny Stocks: How To Retire in The Philippines

1. Use a Fundamental Stock Screener

Where do you find a list of penny stocks and cheap stocks to trade? Some investors will gravitate to message boards and forums, or just wander aimlessly from stock to stock without having a clear idea as to which company is a suitable pick. You can avoid this fate and find some of the best penny stock picks by using an automated screening device. Bing Finance is one fundamental stock screener that filters through companies not listed on major exchanges. Over The Counter (OTC) Markets is another screener that currently has around 10,000 securities listed, many of which are penny stocks. This number gives you an idea of how many companies you might miss if you focused only on the major North American stock exchanges.

Using a stock screener will help you filter stocks based on the following:

Book or intrinsic value
Growth, earnings, or revenue
Dividends
Cash flows

Just keep in mind that some OTCBB exchanges have few requirements for companies to report income statements and other financial filings. Stocks with spotty reporting may not show up on your radar, but that could be a risk worth taking.

2. Make Use of Support and Resistance Levels on Charts

Many people cringe when technical analysis is brought up. They may feel that it is convoluted, complex, and subjective. This can be true of some technical analysis. If you are new to chart trading, stick to simple analysis techniques such as support and resistance levels.

Support Levels - When the shares fall down to a price and then bounce back up, it is called a support level. The more often this happens at a specific price level, the stronger the psychological support becomes.

Resistance Levels - When prices go up only so far before falling back down, the peak price becomes a roof that creates fear. This is known as resistance.

A simple technique is to look at a 6 month price chart using daily data. Draw a horizontal line underneath and above prices that the penny stock bounced off of. Consider buying on support and selling before resistance.

3. Look at Liquidity

Some penny stocks will only trade a few hundred shares a day while others will trade hundreds of thousands or more. To get an idea of how liquid a company is, multiply the amount of shares by the price to see how much money flows through the company each day. Penny stocks on major exchanges will generally have higher liquidity than Pink Sheets or other Over The Counter Bulletin Board trading. Highly illiquid stocks with only hundreds or a few thousand dollars traded per day can experience extreme volatility. It is difficult to invest a few thousand dollars in such small companies without driving the prices up. Also, when it comes time to sell, prices may plummet since there are few immediate buyers. Ensure your stock has enough liquidity for a fair, average price. Consider using limit orders, which set an overhead ceiling on maximum share price. Limit orders on illiquid stocks may take many days to fill, but the savings are worth it.

4. Don't Look for Penny Stocks that are Jumping on High Volume

Is more liquidity always better? When a stock goes up 50% on high volume, is this a great buy? Probably not. Here's why:

A study by Charles M. C. Lee and Bhaskaran Swaminathan titled, Price Momentum and Trading Volume highlights the link between winning stocks and volume. Consider some of their findings:

Stocks with decreasing volume are more likely to rebound in price

Stocks with a massive surge of volume are more likely to correct in price

The worst performing stocks were ones that jumped in price on very high volume. This seems highly counter-intuitive, but you should reach your own conclusion only after reading the paper. Based on their study, some simple techniques can be employed:

Buy penny stocks that previously went high in price on high volume, but are now trading at decreased volume levels

Buy penny stocks trading down in price toward support levels on decreasing volume which indicate selling is drying up

There are a few other places to look for some bargain investments that may or may not be penny stocks. There are some great sites online that you can use to find the best value stocks:

52 Week Low List

Momentum investors chase after stocks on the 52 week high list. Value investors do the exact opposite. If you want to find cheap stocks, you should scour the 52 week low list. This is one of my favorite places to look for potential buys. Check out sites like Google Finance and Bloomberg for investments that have recently hit their lows for the year. You can get some real value from off of this list. Be careful though because you need to be able to distinguish between a "dog" stock and a stock that has dropped unfairly. You can't just choose any name on this list; you need to find the ones where nothing drastic has changed about the company's underlying fundamentals yet the stock price has dropped significantly.

Analyst Downgrades

Stocks normally see a huge spike in price and volume when they receive an analyst upgrade. Stocks that receive analyst downgrades have the exact opposite reaction. Institutional investors and individual investors unload shares that are no longer rated a "buy" by rating agencies and equity analysts. Look for analyst downgrades on sites like Yahoo Finance and CNBC. Wait a few days after the downgrade and then pounce. You can find quality companies selling cheaply just because a stock has fallen out of favor with an analyst.

Money Flows Buying On Weakness

The Wall Street Journal's Money Flows Buying On Weakness chart is a list of stocks that have dropped and seen the largest inflows of money. This list is updated every 15 minutes and shows you exactly how much money is coming into a stock versus the money going out. This is a great tool for helping you evaluate which beaten down stocks investors feel the strongest about.

P/E Ratio Laggards List

If you want to find the cheapest company in a sector, search through their P/E ratios. It can be time consuming to check every company's P/E ratio. That's where the P/E Laggards list comes into play. This list is a good place to start. The P/E laggards list will rank companies from the lowest P/E to the highest. Companies with low P/E ratios and solid growth rates may be great investment opportunities that the market is discounting. Be careful when it comes to P/E ratios. P/E ratios are very industry specific and shouldn't be used as the sole valuation tool. And if you are intent on using ratios, there are other important multiples to consider such as Enterprise Value/EBITDA, Enterprise Value/Revenue, and Price/Free Cash Flow.