Buying Canadian penny stocks can pay off extremely well when it succeeds. But the odds against business success are high. That’s because Canadian penny stocks are usually involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.
In addition, it’s much easier to launch and promote a stock than it is to start a successful business. So Canadian penny stocks attract more than their share of unscrupulous operators and stock promoters.
How to read between the lines of promotions for Canadian penny stocks
Penny stock promoters love to make deals with major, household-name companies. That’s because they think the public is far more likely to buy penny stocks that have agreements with Teck Resources, BHP Billiton or some other major mining company to finance exploration of their mining claims.
Major company involvement is often exaggerated: When they get a deal with a major firm, promoters often go to great lengths to make it seem bigger than it is. Instead of announcing that the big company has invested, say, $50,000, a stock promoter may issue a press release that says the two companies have entered into a “multi-stage development plan.” The release may say the major company has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or web address for investors to order or download the glossy brochures.
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Big companies have more bargaining power than individual investors: It pays to remember that a big company doesn’t go into a situation like this the same way you do. If the big company agrees to spend $50,000 to study the property, program or gizmo, it will also insist on a series of options that let it invest ever-larger sums on favourable terms. But the big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.
A major mining company will gladly spend $50,000 one hundred times, and lose every penny of it — a total outlay of $5 million — if this means it will get a chance to develop the one rare project that’s worth the investment of, say, $500 million. If it waits till the property, program or gizmo has proven itself, development rights will be much more costly. So it gets in early by investing what are, for it, token amounts of money. That’s why big-company involvement by itself is never a good reason to buy penny stocks.
4 more keys to higher profits in Canadian penny stocks
In addition to avoiding Canadian penny stocks that promote themselves too aggressively (or do so misleadingly) here are 4 more things we look for when we analyze penny stocks for Stock Pickers Digest, our newsletter for aggressive investing.
We want to see experienced management with a proven ability to develop and finance a mine.
We look at environmental constraints where the junior mines are looking for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections
When we recommend junior mines that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
We think you should avoid stocks trading over the counter, where such things as regulatory reporting are lax.
If you buy penny stocks or other aggressive investments, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our very latest analysis—and clear buy/sell/hold advice—on 19 stocks that may be suitable for the part of your portfolio you devote to aggressive investing.
Best of all, right now you can get this issue at no cost when you take a 1-month FREE trial to Stock Pickers Digest. Your FREE trial also includes 5 in-depth investment reports, our weekly Telephone/Email Hotline and much more. Don’t wait! Click here to get started right away.
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