As COVID-19 is forcing people to find new ways to connect, work, and live from home, tech penny stocks are finding renewed interest among the traders. We all know the big rise in the stock prices of Amazon, Tesla, and Apple from the past year. But if you are trading with a small account then these stocks remain mostly out of reach.
Today, we’ll look at what are tech penny stocks, what are the things to focus on while looking for tech penny stocks, what are the most important factors, and how to search for the best penny stocks.
So, let’s get started.
What are tech penny stocks?
Penny stocks are stocks that trade at a very low price. Think about stocks that sell at below $5. They belong to companies that have a very low market capitalization and hence have limited information about them.
Moreover, most of them don’t even have great financials. This makes them a risky investment but some of the companies turn successful making huge profits for the investors.
So, essentially tech penny stocks are stocks that sell for a few dollars in the technology sector such as software or semiconductors.
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What to look for in tech penny stocks?
Most of the tech companies that have helped in digitalization started small. Hence, tech stocks are generally considered good for buy and hold trading strategies. They generally gain value over time.
- Positive earnings per share: The earnings per share (EPS) of a company is a measure of its profitability. You can calculate the EPS of a stock by dividing the price of a stock by its total number of outstanding shares.
- Low price-earnings ratio: The price-earnings (P/E) ratio helps you to determine if a stock is undervalued or overpriced. The P/E ratio can help you assess the performance of a stock compared to similar tech companies in the same price range. This is important for penny stocks since there can be times when a stock price of $5 will be overvalued if the company is not doing well and probably heading towards closure.
- High Year on Year growth: You can look at the tech penny stocks with the highest year-over-year (YOY) sales growth for the most recent quarter. Rising sales show that a company’s business is growing. This is often used to measure the growth of young companies that have not yet reached profitability.
- Low price to sales ratio: Earnings can be arithmetically boosted or suppressed by changing accounting policies. The sales of good companies remain more or less constant over a period of time, are relatively difficult to manipulate, and are less prone to accounting gimmicks. Hence, it is good practice to also look at PSR. The ratio shows the number of years in which a company’s sales equals its market capitalization.If the PSR of a company is 1, it implies that it will take one year for the company’s sales to reach its market capitalization. Generally, for technology stocks, a PSR of less than 0.75 is highly desirable, whereas stocks with a PSR of 0.75-1.5 are considered good picks.
- Tech innovations: Tech stocks are among the most innovative companies out there. Keeping a close watch on new tech developments and product launches can give you powerful insights about when to buy or sell shares.
What other things to look for –
Emerging technology trends
When examining penny tech stocks to consider buying, it’s best to look at overall emerging technology trends. There are several areas of technology that, while not yet mature enough to have an impact, could eventually revolutionize the way we live. Any company that is poised to take advantage of that breakout moment is worth watching.
Other tech-related industries
Other tech-related industries worth watching include energy, IT services, and semiconductors, all of which have many penny stocks that could prove to be diamonds in the rough.
You can also look at the dividend discount model, CCI pricing model, and analyze the company’s free cash flow to assess the intrinsic value of the share.
Remember, the market price of a stock is an indicator of its demand and supply which can change due to several external conditions. Hence, while investing, it is important to consider factors internal to the company and assess its value.
What you have to be careful about?
Tech penny stocks generally aren’t as liquid as other stocks. This means that once you buy them, you may have trouble finding someone to sell them to.
Penny stocks generally don’t trade on the major stock market exchanges such as the NASDAQ or New York Stock Exchange. Many are available on an ‘over the counter’ bulletin board. This means that they are not regulated as much as other stocks, and the information is harder to come by.
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