Penny Stocks

Should You Invest in Tech Penny Stocks in 2017?

A glistening red Ferrari zooms by and off jumps a burly man in a black hoodie. He chatters excitedly as he takes us on a tour of his multi-million-dollar villa in Los Angeles. The man is a penny stock trader who turned a small sum into a big fortune, and this is a scene from a reality TV show.

The truth is, if you know which penny stocks to watch right now, you could follow in his footsteps and make some hard cash from technology penny stocks in 2017.

This man is Timothy Sykes, a penny stock trader-turned-millionaire. And I’m watching him on my TV screen as he gives a sneak peak into his luxurious lifestyle on Steve Harvey’s show.

Sykes has turned $12,000 into roughly $2.0 million in just four years of trading. His is the archetypal story of rags to riches.

In the trading world, Tim Sykes is celebrated by rookie penny stock traders as the man who pulled the rabbit out of the hat. But not everyone can be Tim Sykes. One misstep, and the dream of making quick riches can go down in flames.

How to Invest in Penny Stocks with My “Three-V” Formula

If you’ve followed my writings, you must be aware that I’m not a huge fan of trading. And yet, I’m not shy to admit that investing in penny stocks has always seemed very alluring.

There’s one problem, though. These stocks sell for pennies for a reason. They have no promising fundamentals that can attract average investors. To put it mildly, investors find most penny stocks to be garbage investments.

Now, I hate to break this to you, but most financial journalists are not sincere in pitching penny stocks.

On one hand are the slackers who cut corners. To make their life easy, all they do is use a stock screener to screen out stocks trading under $5.00. Then they make a pitch without doing much homework on the company. That’s easy. Anybody can do it.

Then there are others who secretly hold the penny stocks they’re tipping you on. They pitch you to buy the stocks without disclosing their positions and later sell on a pop—what we call a classic pump-and-dump strategy.

But then who do you trust and where do you invest?

Let me be honest. Penny stocks are likened to gambling for a reason. There is no foolproof way to make money on penny stocks. And yet, impossible is nothing, my friends!

My modus operandi for picking penny stocks comes for free to my readers. I call it the “Three-V” formula. If you’re a novice investor in penny stocks, these three Vs might make it easy for you to screen out the right tech penny stocks to watch. 

So let’s dig in!

The first of the three Vs is Volume. By volume, I mean the number of shares of the stock that trade on the exchange on a given day. This is the most essential metric to consider when investing in penny stocks.

Why is it important? Because we’ve already established that penny stocks are not the hottest of tickers. The majority of the investor community steers clear of them. Low demand is what forces their prices to stay low. This causes their volume and, ultimately, their liquidity to shrink.

Low liquidity means the bid-ask spread is wide for these stocks. What does it mean? Let me explain.

If you’re ready to sell but there aren’t enough buyers out there, you’ll have to settle for an unfavorable price. In other words, you’ll be “asking” more, but the buyer will be “bidding” less. Hence, the wider spread.

So if a penny stock is relatively actively traded, it means you’ll have less trouble buying or selling it, and consequently, the bid-ask spread will be narrow. My rule of thumb is that for stocks trading under $3.00, I look for average volumes of at least 200,000. A penny stock with an average volume of over a million could be a steal.

The second V is Value. It doesn’t take one to be an MBA to understand that tech penny stocks come cheap for a reason. Like I’ve said before, they usually don’t have the fundamentals to score a better valuation. In most cases, the company behind the penny stock is not profitable.

Worse yet, “profitable” technology penny stocks can be particularly elusive. Their performance hinges on one big idea that can either take off or completely crash.

This is why I often rely on technicals for valuing penny stocks. It’s okay if you don’t understand the nitty-gritty of technical analysis. All you need to look for is one basic indicator.

Begin with the stock price history for the last one year and look for support and resistance levels. Simply put; support is the range of minimum levels to which the stock price dropped before reversing its trend. Resistance is the maximum levels to which the stock price rose before reversal. Take a peek at the price chart below for a tech penny stock—Groupon Inc (NASDAQ:GRPN)—to get a grip of what I’m talking about.

The range between the support and resistance levels is your trading range.

Chart courtesy of StockCharts.com

Once you’ve figured it out, the rest is easy. Just compare the current price with these support and resistance levels. If it’s closer to the resistance level, steer clear. That’s because you’ll essentially be overpaying for the stock. It makes more sense to buy when the price hovers over support levels.

Finally, the last V gauges Volatility. The one striking reason why penny stocks are more popular with traders than investors is this one factor. Penny stocks are highly volatile. With volatility comes high risk, and with high risk comes high reward. Except that last part is not a constant in the trading equation. High risk can also translate into hefty losses. So when given a bunch of volatile penny stocks, pick the one with low volatility.

A good measure of volatility that I use is the Average True Range (ATR). You don’t need the formula for it. Just use a good price-charting tool that shows you the ATR indicator.

Next, look for two things. The first is the up and down swings in the ATR line. The more swings there are, the more volatility there is. I like penny stocks with little oscillations in their ATR line.

The second thing to note is the value of the ATR. The higher the absolute value of the ATR, the more interest buyers and sellers have in the stock, so the less volatile it will be.

Compare two technology penny stocks—Zynga Inc (NASDAQ:ZNGA) and Glu Mobile Inc. (NASDAQ:GLUU).

Chart courtesy of StockCharts.com

Chart courtesy of StockCharts.com

You can see the ZNGA stock ATR going haywire, while the GLUU stock ATR shows fewer bumps. Also note that the absolute value of the ZNGA ATR is 0.068, which is much lower than GLUU’s 0.108. The conclusion is obvious. ZNGA is a more volatile penny stock than GLUU stock.

All this may seem arduous at first, but once you get a good hold of the Three-V formula, being able to pick out the penny stocks to watch will be as easy as pie.

Let’s get down to business now.

Where to Buy Penny Stocks?

It is no revelation that most penny stocks don’t meet the stringent listing criteria of bigger exchanges like NYSE and NASDAQ. Naturally, they either get de-listed for failing to comply with the exchange regulations or don’t get listed in the first place. So most of these penny stocks end up trading on over-the-counter (OTC) markets, particularly the OTC bulletin board (OTCBB) or through pink sheets.

By the way, in case you’re wondering, pink sheets are just the paper version of digital exchanges. The only difference is that stocks that trade through pink sheets are small and opaque. Plus, public information on these companies is sparse. So brokers buy and sell them on the phone.

OTC markets don’t force any strict rules of compliance. So nearly any company can get listed on them. And since their visibility is low, these companies don’t receive reliable analyst and media coverage. The result is that little is known about their business and financials. This is why I take investing in these stocks with a grain of salt.

But that doesn’t mean we can’t find any penny stocks on big exchanges. I’m sure you’re aware that tech companies usually list on the NASDAQ, and if you look closely, you can spot dozens of technology penny stocks being traded on it. Below are some such NASDAQ-listed penny stocks to watch.

Top Technology Penny Stocks to Watch

I’ve compiled a list of five such NASDAQ-listed penny stocks that could be amongst the best technology stocks to watch in 2017.

Bottom Line on Best Tech Penny Stocks 2017

Penny stock investing may not be for everyone. Parlaying your winnings on a few successful trades will not necessarily turn you into the next Tim Sykes. And yet, it is not something that should give you the heebie-jeebies.

Just remember, when Buffett started off his investing career, he too started off small. He invested in quite a few little-known companies just because their moat was strong. If they were selling on an exchange, they would have likely been selling for pennies on the dollar.

Right now, only you see your hand. Either you raise the stakes to go all in, or you play it safe. Should you decide on doing the latter, my Three-V formula might come in handy. Bear in mind, though, that the picks on my list of top technology penny stocks to watch might not check on all three Vs. That territory is left open for you to explore now.