What You Should Look for in a Penny Stock

Making money by investing in the stock market isn’t easy, but I bet you knew that already. If it were easy, a lot more people would be speculators, and the number of investment opportunities would diminish.

Lately, I’ve been researching the market for beat-up, downtrodden stocks, or what many of you may call “penny stocks.” Most of these companies are penny stocks because they deserve to be.

Most institutional investors ignore penny stocks, and they do so for good reason. Companies certainly don’t complete their initial public offerings (IPOs) at penny stock prices. Usually what happens is that a business experiences some serious operational troubles, which lead investors to abandon the stock. Herein lies an opportunity for the savvy investor.

Generally speaking, I’m not a big fan of penny stocks. I know that may surprise you, but I’ve found it much easier to find stocks that go from $10 to $20 per share, rather than $2 to $4. Stocks trading below the $1 per share level are super-high-risk. Of course, sometimes it doesn’t take much for $0.50 stock to move to $0.80.

I recently discovered iLinc Communications Inc. (AMEX/ILC). This stock used to trade at over $8 per share, but, for the last six years, it has languished below the $1 per share level. This presents us with an investment opportunity, commensurate with an enormous amount of investment risk.

iLinc Communications sells Web conferencing software and audio conferencing services. Customers can purchase iLinc Web conferencing software and install it on their own computer network. The company’s suite of Web conferencing products includes “MeetingLinc,” “LearnLinc,” “ConferenceLinc,” “SupportLinc,” “Audio Conferencing Services,” “On-Demand Conferencing,” and “EventPlus.”

According to the company, its revenues grew 15% to $3.5 million in the latest quarter ended September 30, 2006, up from revenues of $3.0 million generated in the same three-month period last year. For the six months ended September 30, 2006, revenues grew 24% to $7.1 million, up from revenues of $5.7 million generated in the same six-month period last year.

Net income in the latest quarter was $156,000, or breakeven per basic and diluted share, as compared with a net loss of $521,000, or ($0.02) per basic and diluted share, last year. The company generated net income of $290,000 for the six-month period, or $0.01 per basic and diluted share, as compared with a net loss of $1.4 million, or ($0.06) per basic and diluted share, in the comparable six-month period of the previous fiscal year.

The latest quarter represented the company’s fourth consecutive quarter of profitability, and company management expects margins to improve over future quarters. The company also expects to beat its previous target of 22% annual revenue growth for fiscal 2007.

An as investment analyst focused on smaller companies, I’m always attracted to companies that have turned the tide of losses to a wave of profits. iLinc’s stock languished for a long time because the company couldn’t turn around its business profitably. Now, it finally has its act together, and I think the story makes for an interesting risk-capital turnaround opportunity. Speculators might want to put this stock on their radar screen.