How Leverage in Small Stocks Enhances Their Value
Some investors say that penny stocks are risky, unproven shell companies headed for disaster. In truth, they are right some of the time, but not always. Financially strong microcap companies with proven concepts and business models provide tremendous leverage--a penny stock investor's best friend.
In order to illustrate the benefits of leverage, let's examine ZAGG Inc. (ZAGG)--a former Bowser Company of the Month. We recommended ZAGG in December 2008 at $0.93 a share. If you were to invest $1,000 into ZAGG at our recommended price, you would have been able to purchase approximately 1,075 shares.
Since our recommendation, ZAGG has risen 737% (using 12/19/12 closing price). So, the $1,000 initial investment would now be worth about $8,363.50--a gain of $7,363.50. See ZAGG's chart below.
ZAGG rode the Apple Inc. (AAPL) wave, producing Apple accessories. Instead of ZAGG, you could have invested your $1,000 in the "safer" and larger AAPL at $95.90 a share. This transaction would have resulted in about 10.4 shares of AAPL. On December 19, 2012, those shares would be worth $5,473.62--a gain of 447%. See AAPL's chart below.
While both stocks appreciated considerably over the given time period, ZAGG resulted in the larger gain. The lower share price allowed for greater appreciation--LEVERAGE. In order for AAPL to have appreciated the same amount, it would have had to risen to about $675--a mark it reached near its high. However, now trading near its 52-week low, ZAGG still beats AAPL's gain. Using recent prices, an investment in ZAGG would have resulted in a $7,363.50 gain; an investment in APPL, a $4,230.10 gain--now that's penny stock leverage!
As always, due diligence is a must. Prior to recommending ZAGG, we did our research. The company was profitable, proven and growing. Not all penny stocks are like ZAGG. So, they won't all appreciate like it did. However, investing in a solid penny stock company can result in far greater gains than investing in a larger company.
Leverage is an enormous upside to penny stock investing. Less initial capital can result in tremendous gains if invested wisely. When you understand the risks, investing in small stocks can net wonderful profits.
The Bowser Report is a monthly financial newsletter that specializes in small stocks trading for $3/share or less. Our goal is to provide the individual investor with relevant information on microcap stocks. Each month, we recommend a new company, provide information on past recommendations and report news surrounding the microcap marketplace.
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Information in this blog post contains references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.