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Invest in Penny Stock for Long Term

To be honest, there are a lot of garbage companies in the penny stock (or micro-cap) space. But within this immense heap of garbage, there also exist some “diamonds” in the space as well.

When you find these “diamonds,” you can easily make 5x-10x+ on your invested capital.

Paint protection and flat glass film protector company Xpel is a good example of a “diamond” in the micro-cap space.

Penny Stock for Long Term


As a retail investor, I believe that investing in micro-cap companies is the best way for wealth creation because.

  1. Micro-cap companies are easier to understand because unlike large-cap companies, micro-caps typically only have one arm of business.
  2. Institutional capital can’t enter until the stock price is above $5, meaning less eyes and competition.
  3. When institutional capital does enter or the stock gets listed on NASDAQ or NYSE, the inflow of new liquidity will drive the stock price vertical.

Now, if you’re looking for a systematic way of sourcing for “diamonds” in the micro-cap space, below is a good starting checklist.

Penny Stock for Long Term

1. The Company has a Market Cap of <$50 Million.

  • The micro-cap space is where big institutional players can't enter because most of these institutions can’t invest in anything below $5/share, and therein lies your advantage.
  • If you can find small companies that are doing well before they get analyst and institutional coverage, you’d be able to have multi-bagger returns just by front-running institutional capital alone.

2. Current Earnings

  • Strong double-digit sales and earnings growth.
  • Accelerated quarterly sales and earnings growth.
  • Big accelerating earnings growth attracts institutional investors.

3. Annual Earnings

  • Strong double-digit sales and earnings growth over the past 3 years.
  • Return-On-Equity (ROE) of 17% or higher
  • Annual earnings are important because a company can cut costs or take other measures to boost their earnings for a quarter or two, which might not be sustainable.

4. Institutional Sponsorship

  • Have there been an increasing number of funds owning the stock in recent quarters?
  • Who are these funds that own the stock (have they outperformed the market)?
  • Again, your goal here is to front-run institutional capital.

5. Huge Total Addressable Market (TAM)

  • Total addressable market is defined as the existing revenue opportunity (or total market demand) available for a product or service.
  • The bigger TAM, the better.

6. Clean and Tight Share Structure

Penny Stock for Long Term

  • Look at how many shares are outstanding and the breakdown of that number.
  • How tightly are the company’s shares held? The tighter the better.
  • What % of shares does management and other funds hold?
  • For example, if the company’s management holds 68.4% of the company’s shares, when institutional investors enter, the stock can’t help but go parabolic because of supply-demand imbalance in free float.

7. Management is Aligned With Shareholder Interest

Does management care about shareholders, or does management throw shareholders under the bus?

Do your due diligence on the company’s executive team, each of their backgrounds, as well as their past business decisions.

Read Also : Best Robotics Penny Stocks

Don’t know where to start?