Thursday, July 15, 2010

How to Assign a Value to the Best Penny Stocks

By Chad Kettering
When trying to assign a value to a penny stock, one of the factors to look at is the cash per share that the company has. The cash per share is a public number you can find by going to an online finance site or within a brokerage account you may maintain. By looking at the profile of a reporting company, you should be able to see how much cash per share the company has. Many companies that are struggling still have large cash reserves from previous operations.

Let's use the example of ABC Corporation, a small electronics manufacturer. ABC's current strategy may be faltering because of a recent loss of a big contract. Although ABC no longer has that particular contract, it maintains a $2,000,000 cash reserve from earnings derived while servicing that contract. The $2,000,000 could be used to secure additional contracts to increase its earnings. The cash reserves could be used to start another business or to acquire an existing business. Cash is the most valuable asset a company can have due to its liquidity. If ABC Company has 1,000,000 shares outstanding, it would have cash per share of $2. Many companies in this situation are trading for under their cash value since investors ignore the cash at hand and just focus on the short-term situation of the company. The experienced investor knows that company is an attractive acquisition candidate. Any acquirer can buy the company for $1 and use the cash per share for further business ventures. It would be like going to the bank and withdrawing $10,000 for only $5,000.

Another valuation method is to value a company by the multiples of sales it sells for. This is called sales per share, which is simply the sales of a company divided by the number of shares. At $1 sales per share a $2 stock is selling for twice its sales. Compare that number to other stocks in the same industry and see which stock sells for a lower sales multiple. The stocks with the lower sales multiple would be considered a better value according to this method. Now, many of the best penny stocks do not have sales so you may have to use alternative methods such as book value, PE ratios, market cap and the size of the float to help determine a company's stock value.

About is a website that profiles stocks of interest. We are not licensed brokers or financial consultants. Please be advised that the information contained may or may not be complete and is solely for informational purposes only. This is not to be construed as an offer to sell, hold or the solicitation of an offer to buy. Investors are encouraged to seek opinions by their registered brokers or financial advisors after extensive due diligence is performed.

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