Blog : Contrarian Investing in Picks

by Peter Leeds on February 27th, 2012

Penny stocks blog - Contrarian Investing in Penny Stock Picks

In today's penny stocks blog:

• Investor sentiment in penny stocks

• Minor upgrade to the Peter Leeds penny stock newsletter

Here's a quick tip for penny stock investors that you can use to reduce your losses, while finding opportunities in penny stocks.  It is about understanding investor sentiment.  As it applies to penny stocks, the more people who agree, the more likely the penny stock's shares are over priced.

Investor sentiment in penny stocks is a contrarian indicator.  The more people who believe a specific penny stock pick will go up in price, the more likely that penny stock is near a top, and due for a fall.

Remember that investor sentiment is a contrarian indicator with large cap stocks and blue chip stocks as well, but that it is especially true with penny stocks.  That is because penny stocks are generally more thinly traded, and those same penny stocks are typically more driven by speculation.

If everybody and their grandmother is telling you to buy a specific penny stock, then don't go anywhere near it.  The penny stock will be overvalued, and with everyone thinking it is a great thing they are more likely to have bought in already, less likely to sell, and are certainly telling all their friends and coworkers about that "life changing" penny stock.  If everyone thinks a penny stock is a good buy, beware.  Where's your angle for profits?

A much better strategy to profit is getting involved with penny stocks that are undervalued.  Stocks or penny stocks that few people know about, or that are being sold in an unjustified panic.  

Consider our penny stock pick Ford Motor Company (F), when it was at $1.87 and GM had just gone bankrupt.  People were dumping shares, pushing Ford into penny stock territory, and highly undervalued levels.  We profiled Ford to buy, and it rose to $16 in about 14 months. 

When you think of penny stocks, you don't generally think of Ford, but it was a penny stock then.  It's not a penny stock any more.  We played the investor sentiment angle perfectly, knowing it was a contrarian indicator, and a Leeds Analysis review showed us that Ford was in good shape, despite GM's bankruptcy.

Next time you are looking at a specific penny stock, or doing analysis of some penny stocks yourself, think about investor sentiment.  If sentiment is already positive, and significantly so, back away from that penny stock.  On the other hand, when no one wants anything to do with a certain penny stock, or sector of penny stocks, take a look at getting involved (assuming that the underlying penny stocks are fundamentally solid).

Remember, this truth applies to Blue Chip stocks, and large cap stocks, but it is especially true (and effective) when applied to penny stocks and penny stock companies.

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We are looking at implementing a minor upgrade to the Peter Leeds penny stock newsletter.  Specifically, we would add a small comment beside each of our penny stock picks indicating what type of industry that particular penny stock was involved with.  

For example, each previous penny stock pick would say "oil & gas production," or "technology," or "biotech," etc...  This was requested by a few penny stocks subscribers, and I think it is a good idea.

With 3 years of archived penny stock picks, it would make it easier to scroll through and check out the penny stocks that are in specific industries that interest you.  

I've been in talks with my programmer and he's good to go, but he's working on something bigger for us, so it will have to wait a little longer.  I will, however, ask him to implement the new feature to the Peter Leeds penny stocks site soon.

Until then, we remain committed to bringing you the best in penny stocks and penny stock picks.