Penny Stock Portfolio – Part 2

penny stocks portfolio

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Today’s post is another guest post from Trader Tim. Tim has his own blog here, and you can also find him on Twitter here

The views expressed in the article below are Tim’s and may not reflect those of Mike or 7 Circles.

If you would like to write a guest post for 7 Circles, please contact Mike via mike@the7circles.uk

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Welcome to the second post in the series on penny stock investing! Today, we’ll look at the bull flags to look for when identifying potential penny stock investments. We’ll also add our first penny stock to the portfolio, an exciting wearable tech company!

Bull Flags

First, I wanted to cover off some the important to look for and things I’ll be looking for when adding penny stocks to the portfolio.  

Contract News

It may seem obvious, but naturally if a company releases an RNS communicating that a new contract that will bring revenue into the company then this is a positive sign.

  • A very definite bull sign that the business is appealing to consumers
  • Proof that consumers are willing to pay for the goods or service
  • It’s secured revenue for the company

These type of announcements, which are run-of-the-mill for big established businesses, are of paramount importance for finding penny stocks with potential. If you look around at the penny stocks on offer, you’ll be shocked at the number of listed companies that are making zero revenue.

  • Some of the companies have seen their share price rise and fall significantly on nothing but hype.
  • Penny stocks are all about perception and reality.
  • Penny stocks can comfortably double, triple or even quadruple in value based on what the perceived value of the company is.
  • Typically, this is driven by hype and hope.

This perception makes a handful of traders, who are well-attuned to the markets, an absolute fortune. Unfortunately, most investors, wind up losing mountains of cash as the pedestalled perception of the company begins evaporate into something far less valuable.

Contract news is important for penny stocks as it will provide some vital financial data.

  • The size of the contract?
  • The volume of units?
  • The price per unit?
  • The length of the contract?

With this data, it allows investors to more accurately forecast what the revenue of the company will be. It requires speculation, but using real figures mean the speculation is a little more informed. You can then cross-compare  your forecasts (sales, revenue, contracts) to those projected by the company.

Financing

Now, I wrote a little bit about this in the last post. We said that a rule of the portfolio is that only companies with a good track record of raising funds will be considered. However, financing can also be a bullish sign.

  • Most investors would associate raising capital as a negative sign, a sign the business is running out of cash and the potential of share dilution.
  • These are correct concerns, but they are to be expected with penny stocks.

Investors in such small companies are fully aware that fundraising will be part of the ride. As long as fundraising is not done at a massive discount to the current market price, the share price should remain relatively stable. If a penny stock raises funds at the market price or at a premium, this is a very bullish sign.

  • It suggest institutions are really buying into the business
  • Not only this, they would normally expect to buy shares at a discounted price
  • In the event that they don’t, they are essentially so desperate to get their hands on shares in the company that they are willing to forego any discount and in some cases even pay more money.

It reassures the market and investors that these shares are good value at their current price, which often prompts the price to go slightly higher. From a business point of view, an injection of cash will allow management to grow the company at a more rapid rate.

Partnerships

Similar to contracts, but without actual money. Company’s are agreeing to buy the product, but rather distribute or sell it for example.

  • If my company makes a product, I may partner with Tesco or Amazon to distribute this.

This is less concrete than a contract because a product may be on Amazon, but that doesn’t mean people will buy it.

  • The financials are generally undefined
  • The agreement between supplier and distributor are generally vague

Partnerships create optimism, so this will positively impact a share price. Whether this will be sustained long-term is a more difficult question?

  • This can only be answered by your own research and judgement
  • Partnerships will at least boost the company’s exposure
  • If you are confident the product is good and needed, you’d assume revenues to flow from this, though this is not guaranteed

Nevertheless, for a tiddly penny stock to strike a partnership agreement with big companies like Tesco or Amazon is pretty significant news! This will drastically improve the odds of the company growing into something more substantial.

Growing Industry

Sometimes news doesn’t even have to be related to the company to boost the share price. Penny stocks are more suited to tap into a new trend or growing sector than their bigger brothers.

  • Penny stocks are the among the most agile companies around.
  • Generally, smaller stocks are also more innovative than FTSE stocks
  • For example, a small cyber security stocks tend to receive a boost when there is a high-profile hack; or
  • a research paper saying in 2020 we’ll be using 20 times the amount of copper we currently use will boost copper miners
  • Penny stocks can be the first movers in the most cutting-edge trends

The boost to the share price will rarely be as significant as positive news related to the company itself.

However, penny stocks can be right at the front of a progressive trend – solar power, wearable tech, cyber security, mobile payments – that will be commonplace in 5, 10, 20 years.

With growth in the trend, there will usually be growth in the company. It can be a difficult thing to judge, but is definitely one of the best ways to identify penny stocks that have serious long-term growth potential.

CloudTag: The First Stock In The Portfolio

Now to move on to our first stock pick for the portfolio, we’ll only do this one this week as I spent most the time waffling about potential good things to look for. The company we are going to look at is CloudTag (CTAG). This is a stock I hold myself. They meet the criteria specified in the first post.

  • A spread around 5% .
  • The share price is trading just shy of 5p
  • Market capitalisation is £17 million
  • 6 capital raisings since April ‘16 – all at the market price or at premium a price (one at a 37% premium!)
  • Experienced management that have grown and sold businesses
  • CEO sold Biosense, a medical device company, to Johnson and Johnson for $400 million

Cloudtag have great potential. They make wrist devices that monitor heart rate, calorie burn and other activity – like FitBit, but supposedly more accurate.

  • Like most wrist devices, Fitbit, Garmin and others measure your heart rate by shining light through the skin and monitor the change in the rate of blood flow to and from the heart.
  • This relies on optical heart monitors.
  • By contrast, CloudTag uses advanced ECG sensors, which provide a more accurate reading, to monitor calorie burn and heart rate.
  • As a result, CloudTag can produce these metrics with clinical-grade accuracy at £89.99 a pop.

Wearable tech is undoubtedly a growing sector, which already commands a significant share of the market, so Cloudtag appear to be in the right sector at the right time.

  • FitBit currently have a market cap of $3 billion, so there is a huge market for these devices
  • I also like the fact that some of the big tech giants – Samsung, Apple, Google – haven’t ventured too far into these types of devices yet
  • Cloudtag may have potential as an acquisition target further down the road
  • CCS Insight suggest the wearable tech market will hit $34 billion by 2020

Wearable tech is a growing sector, which has multiple applications.

  • It will obviously appeal to the large market of fitness enthusiasts, who justify FitBit’s current multi-billion dollar valuation.
  • The professed clinical grade technology CloudTag is bringing to the table also opens up other avenues such as healthcare and insurance companies.

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See also:  Penny Stock Portfolio - Part 3

Let’s look more specifically into the company now.

One of the main benefit CloudTag has over its competitors is accuracy, so I wanted to verify this. Looking at the half-year results RNS:

  • The company had successfully tested the product with the Human Performance Unit at the Centre for Sports and Exercise Science, University of Essex.
  • This testing showed the product to be comparable to “industry gold standard medical equipment”
  • ECG tracking had “98-99% accuracy”
  • Calorie tracking “between 91-99% accuracy”

This USP seems to be genuine, obviously we are dependant on the company being truthful, but it’s the best we have.

Looking at commercials, the company closed a distribution deal with European distributor, Second Chance, worth a minimum of $5.2 million in January. More recently, the company announced it was concluding initial product delivery requirements with:

  • The largest online electronic commerce and cloud computing company in the UK and USA;
  • a major British multinational department store with large high street presence in the UK;
  • the largest employee owned UK department store;
  • the UK’s largest high street pharmacy for online sales;
  • Europe’s largest electrical and mobile telecoms retailer with significant presence in the UK;
  • the UK’s largest mobile network operator and internet service provider;
  • the two most popular catalogue retailers in the UK;
  • one of Germany’s largest department chains;
  • A worldwide operating retail trust and contractor with business activity in over 20 countries;
  • Europe’s largest retailer for consumer electronics, with over 700 Stores in 14 countries.
  • The Company is in advanced discussions with Amazon Marketing Services to execute sales strategy

Now, as mentioned, this will not guarantee revenue or profit. The company may not sell any products even if it has an impressive résumé of distributors. However, we assume:

  • The company is in a rapidly growing sector
  • CloudTag has a good USP by virtue of its clinical-grade accuracy
  • This distinguishes the product from similar competitors
  • The company is close to agreeing partnerships with major distributors to get the product in front of costumers
  • This will hopefully convert to a high number of sales

Like with all penny stocks, we are assuming a few ifs and maybes, but based on what we know it appears to be a well-positioned company in a rapid growing sector.

We’ll monitor progress in the coming weeks.

I hope you’ve enjoyed this post – I’ll be back in two weeks with some more picks for the portfolio.

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TraderTim

Trader Tim is a writer for 7 Circles, ADFVN, Sentifi & his own blog. You can also find him on Twitter. He writes to help readers learn from both his trading successes & failures.

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Penny Stock Portfolio – Part 2

by TraderTim time to read: 6 min
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