What characteristics of penny stocks make a winner?

This post was adapted from the August 2024 monthly newsletter. For more details on a subscription, click here.

Investing in companies with healthy financials and promising outlooks doesn't always turn a profit (as hard as that is to believe). In our 48 years of recommending small stocks, we have recommended plenty of laggards, but the leaders have offset those losses and then some. About 2/3 of our picks double in time, and the Bowser Game Plan maximizes these results. Last month, we reviewed recent winners and established a short list of key characteristics of penny stocks that increase the probability of success:

1. Record trailing twelve month revenues
2. Beating earnings expectations
3. High revenue per share
4. Share price surpasses the highest monthly close

Leaders 

Before we get into the characteristics of penny stocks that win, let's first look at what the top picks are. To do this, we reviewed recommendations from the past seven years to get a list of the most current top stock picks. The following list features the picks with the strongest performance that are still up at least 50%:

Top stock picks of the past seven years.

Despite being among the top gainers, Altigen (ATGN) and CarParts.com (PRTS) were excluded because of their significant declines. AEHR and LEAT were the best performers by a long shot, both reaching $38 per share or more before pulling back. These stocks also boasted huge revenue and earnings growth over a two-year period. 

Of the remaining picks, DAKT, MAMA and TSSI are the only recommendations that are currently holding the majority of their gains. With the winners in mind, let's jump into what distinguished them from the rest of our picks. 

Winning Characteristic #1: Record Revenues

The most common characteristic is record trailing twelve-month (TTM) revenues over at least six consecutive quarters. The largest streak was LEAT with 14 consecutive quarters, while MAMA currently has the largest active streak of 12. In fact, after considering all common characteristics, we found that record TTM revenue was the best indicator of strong price performance.

LEAT TTM revenues (in millions) from Q2 2019 to Q3 2022, showing consecutive TTM growth.

Winning Characteristic #2: Earnings Beats

The second common trait is that these companies beat earnings expectations for at least four consecutive quarters. While earnings results were mixed, the stocks that consistently beat earnings per share (EPS) expectations significantly outperformed. Below is an example showing MAMA’s quarterly EPS history:

MAMA's EPS history shows several expectations beats in a row.

MAMA beat earnings expectations for six consecutive quarters, four of which had an earnings surprise of at least 150% or better. The stock gained 532% since the streak began in the third quarter of 2023 which includes its small pullback from the earnings miss in the most recent quarter. 

Aside from consistency, another key takeaway is that lower analyst sentiment actually helped the stock by allowing for large earnings surprises.

Winning Characteristic #3: High Revenue per Share 

Another characteristic of these penny stock winners is a high revenue per share ratio (TTM Revenue divided by Total Shares Outstanding). Stocks with a ratio of at least 10 earn a higher Bowser Rating, although this is a rare feat. DAKT and LEAT both have a history of high revenue and relatively small share structures. DAKT’s revenue per share of 17.8 is the only one to meet the Bowser standard.  

Winning Characteristic #4: Price Over Two-Year Monthly Close

We're getting a bit technical here, but each of the top winners surpassed its two-year highest monthly closing price. Using the closing price instead of the high is important here as it is a better indication of the overall demand for the stock. Additionally, the two best performers, AEHR and LEAT, broke above their previous all-time highs.

AEHR's chart shows a break above it's previous highest monthly closing price with high volume.

Although the stocks became more expensive, investors seemed more inclined to pay a higher price as they reached new highs.  

Other Considerations

Other characteristics of penny stocks that win to consider are (1) no excessive dilution and (2) no reverse splits. Dilution is self-explanatory, as investors do not want to buy or hold a stock that is losing value over time, even if the company is growing. AEHR was the only leader to dilute on multiple occasions, and the stock responded very poorly to the news.

Reverse splits often precede dilution, so it is unsurprising to see these traits go hand-in-hand. None of the leaders executed reverse splits or had relatively high share counts. LEAT had the smallest number of shares outstanding and only had one reverse split five years before our recommendation. Investors do not mind paying a higher price per share if there is no dilution or significant change in share structure.   

Putting the characteristics of penny stocks together

Since the start of our publication, the best performers were trading sub-$1 at the time of recommendation. Nowadays, the leaders are often the stocks trading within the $2-$3 range when picked showing that investors are generally willing to pay higher prices.

So, how can you adapt as a penny stock investor? Add these characteristics of penny stocks to your check list when conducting research. Ask yourself:

1. Is revenue hitting new highs on a quarterly basis?
2. Are earnings beating analyst estimates?
3. Is revenue per share higher than $10 for every 1 share?
4. Is share price above the highest monthly close?

If you can answer yes to all four questions and there is no excessive share dilution or reverse split activity, the probability that the stock you're researching is a winner is very high. While there are no guarantees, investing in higher probability winners will dramatically improve your portfolio's results over the long-term.

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