Here’s Why Penny Stocks Are Still Among the Best Options on the Market
Penny Stock Profit
If you’re looking for straight-up gains, there are few investment opportunities that will outpace penny stocks (or that will leave your knuckles as white).
Penny stocks are known for volatility, and that means you can be up by hundreds, sometimes thousands, of points one day, only to see those gains erased the next. Investors have been taught that time and time again, with the most recent lesson coming by way of Eastman Kodak Company (NYSE:KODK).
Kodak stock recently surged by 1,600% in three days. Then, as anyone on the planet could have told you would happen, a massive correction took place, wiping out a good bit of the gains but still leaving the company on a high note (for now).
Which isn’t to say that KODK stock is done seeing gains, but it does mean that investors who want to play the penny stock market should do so with their eyes open.
As just mentioned, penny stocks are prone to both enormous gains and enormous falls, all within a span of a few weeks.
Take a look at the chart below: depending on which day someone invested in Kodak, they would either be celebrating or pooled in tears. A few hours can have a massive impact on a portfolio when playing the penny stock market.
Chart courtesy of StockCharts.com
What this means for investors, then, is that only those who are willing to stomach seismic swings should invest in penny stocks. If you’re trying to squirrel some money away for retirement, this is probably not the best method to do it.
But if you have some extra money lying around and want to put it to maximal use in terms of return value, then you can’t beat the penny stock market. Other securities will be safer and more stable, yes, but penny stocks cannot be beat in terms of return on investment potential.
Kodak stock, then, gave us another perfect example of how penny stocks operate and what makes them so compelling. Getting in on the right stock at the right time has the potential to change your entire financial situation.
KODK Stock Surges
So what happened with Kodak stock, anyways? Why did it go so high and then dip back down in a flash?
We can trace the answer back to the single most important story of the year: COVID-19.
Eastman Kodak Company was the recipient of a massive injection of funds, a loan of $765.0 million from the U.S. federal government. (Source: “Kodak’s Stock Triples as Company Announces Pandemic Plan to Start Making Pharmaceutical Ingredients,” MarketWatch, July 29, 2020.)
Kodak, after being on the receiving end of such a huge influx of cash, surprised nearly every analyst and investor, sending them into a stock-buying frenzy.
The reason for this investment has nothing to do with cameras (the industry that Eastman Kodak Company has been operating within for over a century), and everything to do with COVID-19.
Kodak stock surged as the company pivots away from being a dying camera company to a producer of chemicals for pharmaceutical companies in the United States.
This is a win-win situation: 1) it allows the U.S. to rely less on foreign companies (namely those in China) for medicine-making, and 2) Eastman Kodak Company producing pharmaceutical ingredients at a time when the world is waiting for a COVID-19 vaccine is likely going to be profitable.
What we had was the meeting of two aspects that typically spur growth: undervalued share price and a hyped industry.
Now, to be fair, no one knew that KODK stock was undervalued until that deal was announced. After all, the company had just recently been through bankruptcy in the early 2010s and has been struggling to recover ever since.
It’s not exactly like the camera business is booming these days, considering that everyone and their grandma has a smartphone with a built-in, high-quality digital camera.
But with that government loan (and the potential for more government money down the line, not to mention contracts with Big Pharma to produce COVID-19 vaccines), Kodak stock immediately went from being a stinker to a gem.
With its penny-stock status, it makes perfect sense that the company’s entry into an industry that directly relates to COVID-19 was only going to send KODK stock soaring.
But, as is the case whenever these big, unexpected movements happen on Wall Street, there was a backlash. Namely, a correction.
Kodak stock soared so high in such a short period that it was almost impossible for there not to be a pullback. It’s why I preached tempered caution when I recently wrote about Eastman Kodak Company.
So what does the future of KODK stock look like?
Right now, risky. While it may not have a penny-stock price tag anymore, it is still very much operating like a penny stock. What that means is unpredictability.
For instance, if nothing other than the government loan develops for Eastman Kodak Company, then investors will drip away, either licking their wounds or celebrating their gains, depending on when they first invested in the stock.
If, however, Kodak is able to get something in the news about a Big Pharma deal, another government deal, or a contract to produce a COVID-19 vaccine, well, we could anticipate its shares soaring once again.
And that puts us in a very tricky position with this company.
I anticipate that, in the near future, Kodak stock will continue to dip, and do so for a while yet. But I also believe that, if Eastman Kodak Company becomes a major pharmaceutical supplier just as we near the development of a COVID-19 vaccine, and the U.S. government wants that vaccine manufactured on American soil, Kodak shares will likely surge by hundreds of points once more.
Which, in the end, leaves us right where we started, in a way.
If you can stomach risk and eat losses should they occur, then KODK stock has a lot of potential to be the highest gainer in your portfolio in 2020. If, on the other hand, you don’t want the stress and would rather adopt a safer approach to investing, then it could be wise to steer clear of Kodak stock.
Penny stocks are among the most exciting securities on the market in the best of times, but with the stock market right now on a rally after the coronavirus wreaked havoc in March and April, there is ample opportunity to see massive gains as shares continue to rise.
The operative question, however, is just how much you, the investor, is willing to risk. If you want sky-high rewards and are willing to take a chance, penny stocks like KODK stock could be for you. Otherwise, it might be better to stick to more established investments.