Bullish Penny Stock Investing in 2010

Where I live there’s a huge empty lot that while cleared for construction, never amounted to anything. There’s a flashy sign on the lot too, “New Auto Mall Coming in Spring 2009”.

In 2007 the idea of a consolidated auto mall in the area seemed like a good idea. Not so now. The empty field and sign does make for a good picture though – a visual time capsule of unrealized optimism.

Yes, hindsight is 20/20. And it could have helped out a lot of penny stock and large cap investors in 2009. The markets tossed out a large number of undervalued penny stock companies with strong prospects. While some soared, many deservedly laid dormant and tanked.

Still, 2009 provided penny stock investors with some great returns. With the wisdom of hindsight, I can tell you that Diedrich Coffee (DDRX – Nasdaq) would have made you rich with a year-to-date return of 9,700%. Since going public in 1996, shares of Diedrich Coffee spent most of their time trading as a penny stock under $5 per share. Shares reached an all-time low of $0.21 per share in March of 2009 before skyrocketing to over $35.

Yongye International (YONG – Nasdaq) experienced an annual return of 399%. Yongye International manufactures nutrient compounds for plant and animal feed used in China's agricultural industry. Shares on Yongye began the year trading as a penny stock under $2 each and reached a high of $12 in October. Although off their high, shares bega
December around a healthy $8 each.

Ford Motor Company (F – NYSE) was an excellent penny stock back in February when it was trading for as low as $1.50. On January 6 of this year it hit a new high of $11.46 – for an annual return of 664%.

While there is always a bull market raging in the world of penny stocks, the job of finding excellent penny stock companies with strong prospects is getting harder.

“It's not as easy to find stocks with a huge potential upside as it was in late 2008 and early 2009 when I could find shares with a 300 percent upside. This has now reduced to 100 percent and I even own stocks where it is only 20-30 percent,” said Deryck Noble-Nesbitt, Fund Manager of the Close Special Situations Fund.

Although he and others are cautiously optimistic about 2010, penny stock enthusiasts have a number of reasons of their own to point to for ongoing growth.

Corporate profits of the companies on the S&P/500 over the next 12 months (fourth quarter of 2009 to the third quarter of 2010) are forecasted to increase 27 percent according to Thomson Reuters, and given the merciless cost-cutting, profits could even be higher. That suggests stocks, according to The Globe and Mail, are trading at a price-to-earnings ratio of 14:1.

Corporate balance sheets are in good shape and inventory levels also remain low. “A more forceful phase of restocking seems likely to unfold over the next few quarters given that production growth had fallen so far behind consumption growth during the prior downturn,” said Myles Zyblock, Chief Institutional Strategist and Director of Capital Markets Research for RBC Dominion Securities.

Corporate earnings can only jump because U.S. consumers have an unrelenting appetite to…well consume.

“Despite job losses, struggling consumer confidence and the end of the cash for clunkers, U.S. consumer spending is likely to expand at about a 2-per-cent annualized rate in the fourth quarter,” said Yanick Desnoyers, Assistant Chief Economist with National Bank Financial Inc.

In other words, rising unemployment has not cut into consumer spending. National Bank estimates the U.S. economy will grow by 3.4 percent in 2010.

Yes, it’s easy to identify which penny stock companies could have made you rich in 2009, but remember, the past is not always an accurate indication of what is to come. In fact, there never has been a past that we could look back on as a barometer. This current recession has no peers.