For Consistent Profits, Shun Penny Stocks

You might know someone who crows about the small fortune he or she made in a stock that was bought at a buck a share.

Ormaybeyouhave a pal who landed a huge profit in a stock that once traded a dime a share. Or perhaps you snatched shares of a company at a penny a share and can now brag
to your friends that you sold it thousands of percent higher.

That’s nice. But do you know anyone who has bought cheap stocks and turned a profit consistently?

As a growth-stock investor, you’re more likely to win long-term by focusing your time and money on institutional-quality stocks. IBD’s research of big winners over the past 100 years shows that these stocks not only trade at $30, $40 a share or
higher but that they possess the powerto double or triple in price.

Stock investing is filled with risk. Why boost that risk with penny stocks that can plunge as fast as they can rise in a single day? Don’t forget that the media pay little attention to scores of stocks that get delisted and become worthless.

The best growth stocks don’t hail from pink sheets or bulletin boards.They tend to already own a record of strong earnings and sales growth, a great product or service and a healthy balance sheet before they even begin their big moves in price.

Because of these characteristics, such stocks trade at a “higher” price due to strong demand by institutional investors. Mutual funds, hedge funds, pensions, banks and the investment units of large corporations have the serious money to invest
in companies that will grow in good times and survive in bad ones.

It’shard to resist acheapstock, because it appears the odds of making a profit are much higher. If you buy a stock at $1 a share, it just takes a one-point gain to double your money.Sounds great, right?

Here’s the problem: To see that one-point gain, you’re going to need at least one fund manager scooping up shares. The fund must also stand guard to support the stock if others dump their shares.

Large investors won’t buy a stock if they can’t invest with significant size. Let’s say a fund has $100 million to invest. Two percent of the fund—$2 million—is allocated for one stock.To buy a stock that trades at 50 cents a share, the fund must accumulate 4 million shares, and that assumes the stock price remains
steady. That might be the size of the company’s share float, leaving no
room for other buyers.

Since at least the late 1990s, securities regulators have clamped down on “pump and dump” schemes. A broker or someone posing as a broker would cold-call investors to recommend an ultra cheap stock, saying it would triple in a few weeks or
months. These fraudsters claim they have juicy inside information.

Now, the Internet is filled with newsletters touting stocks with promises that their prices will reach the moon. The SEC gives tips on its Web site, sec.gov, on how to
avoid such frauds. Any company with at least 500 investors and $10 million in net assets must submit filings to the commission.

In an IBD study of 84 market winners during the 2000 to 2008 period, the average price at the breakout was $34.79 per share. Sounds expensive? Well, the average
peak price for these superb stocks was $123.74 a share. It took, on average, 109 weeks for these stocks to hit their peak. The adjacent table shows a sample
of stocks that traded for at least $30 a share 12 months ago and logged
gains of at least 40% over the time frame. In all, 33 issues made the cut.

company, ticker, 12 month % price change, price 12 months ago, EPS, RS & SMR

Netflix NFLX 160 $45.00 97 78 A
Cree CREE 128 31.42 66 89 B
Priceline.com PCLN 123 131.32 99 90 A
Salesforce.com CRM 123 46.73 81 87 B
Bucyrus International BUCY 96 32.68 98 79 A
SL Green Realty SLG 93 32.48 22 91 C
Cimarex Energy XEC 91 37.94 14 76 B
Boston Beer Co. SAM 85 36.67 63 73 B
Concho Resources CXO 84 34.43 56 71 A
Jones Lang Lasalle JLL 81 45.05 44 83 C
Cognizant Tech CTSH 79 34.14 97 84 A
Cummins CMI 72 47.14 26 86 B
Chipotle Mexican Grill CMG 62 93.70 99 80 A
Lubrizol LZ 60 59.93 92 85 B
Wynn Resorts WYNN 60 58.47 61 83 B
WebMD Health WBMD 59 32.30 87 74 B
Apple AAPL 58 165.51 96 81 A
Portfolio Recovery PRAA 57 44.62 74 80 A
Polaris Industries PII 53 38.78 44 82 A
Amazon.com AMZN 51 85.32 65 71 A