Buy Low/Sell High—the Perfect Penny Stocks Messing with penny stocks means high investment risk and high potential rewards. It’s tough making money in this stock market, and we almost lost the whole system in 2009. Looking back at all the financial crises in recent history, all the pain was very real, but a lot of opportunity came out of the chaos. It takes a lot of courage to buy a stock (penny stocks or others) when the rest of the stock market is collapsing. As an armchair investor, you never really know what’s going on with a business unless you’re involved with management. But there is opportunity when industries are in trouble, and lately, some of the bestperforming penny stocks have been related to the housing market—specifically, homebuilders and building supply companies. You might not know this, but one of the bestperforming stocks in the Dow Jones Industrial Average since the stock market collapsed in 2009 has been The Home Depot, Inc. (NYSE/HD). The housing market has been particularly good for this company. Pull up a threeyear chart on the company, and you’ll see what I mean. But getting back to penny stocks, all kinds of stocks related to the housing market crashed, and the result of all this was one of the stock market’s greatest opportunities in recent history. The buy low/sell high investment strategy is only half easy. Picking penny stocks that are bouncing off their lows isn’t very difficult. Getting recovery in share prices is a whole other story. One such housingrelated stock that’s doing great on the stock market again is Headwaters Incorporated (NYSE/HW). This Utahbased building supply company did well on the stock market until 2006, when the housing market began to turn. Just as recent as October 2011, the stock hit a low of around $1.18 per share; it recovered to the $2.00pershare mark, consolidated for a little bit, then took off to its current high on the stock market in 2012. The company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com This is almost a 10bagger on the stock market in just over a year, which is pretty darn impressive. So, the point is that penny stocks are obviously risky, but when all the right factors come together, the results can be impressive. In this particular case, you have a company that was struggling with the housing market for quite a while before it hit a huge new low. But it bounced off this low quite smartly, and this is the trading action you want to see if you’re bottomfishing for penny stocks. Afterward, the company’s share price consolidation was normal, while the reacceleration on the stock market was pronounced. And it was all related to the cause and effect of the housing market, which provided one heck of a great trade on the stock market—the buy low/sell high investment strategy at its best.
It’s useful to run screens of stocks making new 52week or alltime lows if you’re looking for these trades in penny stocks. It takes legwork, and you need that cause and effect to reverse itself. Right now, I’m looking for weakness in penny stocks. The crash and recovery in the housing market was a fantastic trade that is still paying off. To me, the next big opportunity to buy low/sell high is in Chinese stocks, perhaps followed by natural gas, as both sectors have been hit hard.