The year 2008 certainly won't be regarded as a winner for the stock market. There is an upside though - big pullbacks can leave behind big values that will inspire the market's recovery. That's great news for penny stock and small cap stock investors, since those stocks generally lead such recoveries. The question is, did stocks actually hit a bottom in 2008?
But has the market actually hit bottom? Yes, we think it has. We're not naive to the lingering challenges the economy is facing. But, when the market's average P/E gets close to single-digit levels, it's historically been at or near a major bottom.
The argument against a recovery is high unemployment and consistently negative GDP growth. The thing is, those issues - as well as significant corporate losses - are troubles that haven't been overcome before. It may still be challenging in 2009, but the market's growth/contraction cycle is ultimately reliable.
But just how precise does an investor's re-entry need to be? There's the rub - nobody really knows when the exact bottom has been made until after the fact, but nobody can really afford to not be in the market at the exact bottom.
On average, the twelve-month gain following a market bottom is approximately 32%. Removing the very first week of that twelve-month rally, however, pulls that gain down to only about 24%. Take out the first three months of the recovery rally, and your gain is merely 15%. Point being, an investor just can't wait for a perfect time to become bullish.
What about small caps during the early stages of a new bull phase? Same story, based on recent data. Coming out of 1990's funk best served the Russell 2000 Small Cap Index in 1991, with a 43.7% gain that year. The S&P 500 gained only 26.3% in 1991. Following the 2002 bear market, the Russell 2000 easily topped the S&P 500 in 2003. The Russell was up 45.4% that year, versus a 26.4% gain from the S&P 500.
The point is, small cap stocks (many of which are penny stocks by the end of a bear market) are also an investor's best bets during the early stages of the next bull market.
Sure enough, in the aftermath of 2008's debacles and 2009's stimulus efforts, many of these small cap stocks and penny stocks are starting to perk up ... not unlike how we saw 1991 and 2003 unfold.
Take Neoprobe Corp. (OTC:NEOP) as an example. Shares gained 99% in calendar 2008 despite the company not being profitable, yet. The motivation for the buying is what may come next year; analysts are expecting earnings of 10 cents per share. For a stock trading in the 60 to 70 cent range, the forecasted P/E of around 6.5 means the rally could continue into the year.
Basic Earth Science Systems Inc. (OTC:BSIC) is another bulletin board company that may have been unduly beaten up in 2008. Shares fell from a high of $3.04 in mid-2008 to a low of 51 cents by November. The company has remained very profitable though, which may be the reason for the stock's rebound to as much as $1.00 in January ... almost a 100% gain.
CVR Energy Inc. (NYSE:CVI), despite being listed on a major exchange, is still one of those small cap stocks that may have actually benefited from its size during the contraction. This oil refiner swung to a profit during 2008, and has continued to widen its margins. Shares gained 136% between late October and late January.
The message is simple - the stock market's implosion has highlighted the best of the best stocks. A lot of them appear to be small and micro cap penny stocks, including a big batch of bulletin board equities. And as you can now see, picking the right penny stocks at the right time can translate into superior returns. An investor's job is simply to go out there and find them.
But has the market actually hit bottom? Yes, we think it has. We're not naive to the lingering challenges the economy is facing. But, when the market's average P/E gets close to single-digit levels, it's historically been at or near a major bottom.
The argument against a recovery is high unemployment and consistently negative GDP growth. The thing is, those issues - as well as significant corporate losses - are troubles that haven't been overcome before. It may still be challenging in 2009, but the market's growth/contraction cycle is ultimately reliable.
But just how precise does an investor's re-entry need to be? There's the rub - nobody really knows when the exact bottom has been made until after the fact, but nobody can really afford to not be in the market at the exact bottom.
On average, the twelve-month gain following a market bottom is approximately 32%. Removing the very first week of that twelve-month rally, however, pulls that gain down to only about 24%. Take out the first three months of the recovery rally, and your gain is merely 15%. Point being, an investor just can't wait for a perfect time to become bullish.
What about small caps during the early stages of a new bull phase? Same story, based on recent data. Coming out of 1990's funk best served the Russell 2000 Small Cap Index in 1991, with a 43.7% gain that year. The S&P 500 gained only 26.3% in 1991. Following the 2002 bear market, the Russell 2000 easily topped the S&P 500 in 2003. The Russell was up 45.4% that year, versus a 26.4% gain from the S&P 500.
The point is, small cap stocks (many of which are penny stocks by the end of a bear market) are also an investor's best bets during the early stages of the next bull market.
Sure enough, in the aftermath of 2008's debacles and 2009's stimulus efforts, many of these small cap stocks and penny stocks are starting to perk up ... not unlike how we saw 1991 and 2003 unfold.
Take Neoprobe Corp. (OTC:NEOP) as an example. Shares gained 99% in calendar 2008 despite the company not being profitable, yet. The motivation for the buying is what may come next year; analysts are expecting earnings of 10 cents per share. For a stock trading in the 60 to 70 cent range, the forecasted P/E of around 6.5 means the rally could continue into the year.
Basic Earth Science Systems Inc. (OTC:BSIC) is another bulletin board company that may have been unduly beaten up in 2008. Shares fell from a high of $3.04 in mid-2008 to a low of 51 cents by November. The company has remained very profitable though, which may be the reason for the stock's rebound to as much as $1.00 in January ... almost a 100% gain.
CVR Energy Inc. (NYSE:CVI), despite being listed on a major exchange, is still one of those small cap stocks that may have actually benefited from its size during the contraction. This oil refiner swung to a profit during 2008, and has continued to widen its margins. Shares gained 136% between late October and late January.
The message is simple - the stock market's implosion has highlighted the best of the best stocks. A lot of them appear to be small and micro cap penny stocks, including a big batch of bulletin board equities. And as you can now see, picking the right penny stocks at the right time can translate into superior returns. An investor's job is simply to go out there and find them.
About the Author:
John Monroe has devoted over 20 years to understanding and effectively analyzing small cap stocks poised to create above average returns. If you would like to receive timely penny stocks trading ideas like the ones described above, the Small Cap Network Newsletter is a tremendous free resource and starting point toward uncovering hidden gems in today's dynamic market environment.
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