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How I Find the Safest, Cheapest Penny Stocks in the Market

By Dan Ferris, editor, Extreme Value
Thursday, March 8, 2007

My first thought was, "Wow... it can't be this easy."

While screening through a few thousand stocks a few years ago, I found the SEC filings of a small company going through bankruptcy. It was a failed venture by Microsoft billionaire Paul Allen, called High Speed Access... and a liquidation sale was inevitable.

The company had 20 cents worth of assets per share left, and it was selling for 14.5 cents per share. Why it was selling that cheap, I have no idea. The company announced the liquidation plan publicly and published a current balance sheet. Anyone could have found this stock and bought it.

After selling off the assets and paying creditors, the company distributed 17 cents per share in cash.

If you bought the stock when I discovered it and didn't make another dime, you'd have made a 17.2% pretax return in less than a year... with almost zero risk. If you can safely get that kind of return somewhere else, that's where you should be putting your money.

Today, I'll show you how to find low-risk, high-reward situations like this all the time. They're all around you, and it's really simple to find them. Anyone with an hour or so of free time each day can do it.

First, I go to Yahoo! Finance. Then, I scroll down on the left and click on the Stock Screener.

Wall Street ignores most of the stocks under $250 million in market cap, so I set the "Market Cap Max" button to $250 million. Sometimes I set it to $500 million, which helps me find opportunities that are large and liquid enough for my advisory Extreme Value. But for your individual purposes, set it to $250 million.

That's all the screening I do.

These steps produce a list of about 4,200 stocks. After the list comes up, click on "Valuation" under "Display for this screen." That'll show you Price/Earnings, Price/Book, and Price/Sales ratios for all 4,200 stocks.

The next step is the one that makes the money mostly because it's something nobody wants to do.

And I mean nobody. I tell my publisher, my fellow analysts, and anybody who'll listen what I do each day, and their eyes glaze over. Which is fine with me. I hope no one ever starts doing this. It is, quite frankly, the only edge I have in the market.

I start with the first stock on the list and proceed one by one, until I come to the last stock in the list. For each of the 4,200 stocks, I systematically look at the financials, insider trading, and business descriptions (from the 10-K, free of charge at www.sec.gov). As necessary, I dig deeper into the SEC filings, 8-Ks, 10-Qs, and other statements. If there's a company website (usually not at this level), I go and take a look.

Yes, that's right. I found the stock I mentioned a moment ago by plodding along, manually screening more than 4,000 equities. I often find nothing when I do this. Companies come and go, and I sometimes skip over some names that sound like tech businesses that would only befuddle me.


Mostly, I'm just looking for companies that are good businesses and are trading at cheap prices that don't seem to be getting the attention they deserve... these underfollowed stocks are the ones that have the potential to rise 100% - or even more - in less than a year. I can't think of a better, safer way to multiply your money.

It might sound boring. But if you find just one great penny stock after all that plodding, isn't it worth it?

I think so. That's how you find penny stocks that can make you 17% in less than a year.

Good investing,

Dan Ferris
 




Market Notes


FERRIS BEATS BUFFETT BY 18 MONTHS

The latest news from the best investor on the planet... billionaire Warren Buffett is still "going global."

In addition to making his first overseas acquisition in Israeli parts-maker Iscar last year, Buffett revealed Berkshire Hathaway has taken a 4% stake in South Korean steel producer POSCO. Word of Buffett's new position sent POSCO shares up 4% on Friday.

While news of Buffett's buying has helped create short-term buying interest in POSCO, the long-term value in holding the company is old, profitable news to readers of Dan Ferris' Extreme Value. The world's third-largest steel producer, POSCO has been in the Extreme Value portfolio for more than a year and a half... and has gained 91% since Dan's recommendation.

Great minds think alike...


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