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Elimination Criteria for Penny Stocks

By applying some strict elimination criteria, you can make the number of available penny stock investments much more manageable. And in addition to shrinking the total universe of choices, you’ll ideally also be left with penny stocks that are somewhat more likely to represent high-quality investments.

You can make the number of potential investment choices dramatically more manageable by eliminating significant subsets of penny stocks based on the following characteristics:

  • Market: Avoid shares that trade on many of the lower-quality stock markets. This is the easiest elimination approach and will do a great deal for your final investment results.

  • Industry: Refining your potential investments to certain industry groups is a quick and easy way to shrink the universe of penny stocks. An added benefit is that, by keeping a close watch on a specific industry, you’ll have greater clarity about corporate players and overall industry trends — knowledge that can steer your trading choices. You may have an added advantage by focusing on a specific industry you’re familiar with.

  • Share price: This is an easy technique to quickly limit the potential investments. Focusing on shares priced at 50¢ or above, for example, will also help you control the caliber of companies, as the higher the price of the shares, typically the better quality the investment.

  • Company size: You may want to focus only on companies with a certain market capitalization. By only considering penny stocks worth more than $100 million, or less than $5 million, you eliminate all the shares that don’t meet your criteria.

  • Trading activity: You may want to avoid stocks that haven’t traded in the last day or two or that are too volatile.

Always adjust your choices of groups over time, based on the results you achieve. For example, you may find that your investing returns are awful when you focus on shares with market capitalizations of between $10 and $20 million, so you may decide to change that parameter to higher levels.

If you’re a newcomer to penny stocks, you can always try the Peter Leeds approach.

For the Peter Leeds newsletter, begin your analysis with the full universe of penny stocks and then eliminate huge chunks of them very quickly by imposing the following strict parameters:

  • Only consider American penny stocks.

  • Don’t choose companies trading on the Pink Sheets and other inferior exchanges.

  • Avoid companies involved in certain industries.

This first level of screening is actually quite simple and not at all time intensive. Then screen the remaining stocks to determine whether they warrant a full review. Only stocks that pass full review should be considered.

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