8 Filters to Develop a Good Penny Stock Watchlist
Dear Penny Stock Millionaire,
Penny stock trading can be hard work…
It requires constant research to plan out your potential plays.
There are a number of different things you need to do as part of your research.
But your ultimate goal is to create a watchlist of stocks that you’re keeping an eye on as you look for chart patterns.
In our Penny Stock Letter, Tim Bohen is absolutely crushing it with the stocks he’s keeping tabs on in his weekly watchlist. He sends that watchlist with a video every single week, in addition to a lot of other education. He teaches you how he’s building the watchlist… and how to use it. Remember our goal is to make you self-sufficient.
To that end, one of the easiest ways to do penny stock research for a watchlist is to use a scanning program to look for stocks based on the specific parameters you define.
For example, you could set up a screen with all of the following eight filters:
A price under $10 dollars.
Penny stocks are those trading at $5 dollars and below. But you can still find some pretty interesting deals if you expand your search to catch anything good under $10 dollars.
ETFs, not funds.
Unfortunately, many mutual funds have bylaws that don’t allow them to take a position in a low-priced stock, which makes them pretty much irrelevant for our needs.
A good filter will ensure you only spend your research time on ETFs.
A market cap between $10 million dollars and $500 million.
This one is flexible based on your trading rules and preferences, but this is a pretty good starting place. If you’re getting too many hits on the lower end (or too many illiquid stocks), try bringing your bottom parameter up to $50 million dollars. If you aren’t getting enough, increase your upper limit to $250 million dollars or just leave your screen uncapped.
Free cash flow greater than $0.
Since penny stocks fluctuate so much, you’re better off evaluating quarterly numbers, rather than the trailing twelve month figures. Setting this screen to $0 will give you the widest possible net, though you can always bump it up based on the patterns you prefer to target.
Revenue growth with robust profit margins.
Screening based on revenue growth is a good way to find penny stocking opportunities, as companies can make money without actually growing. I wouldn’t recommend going as far as using an EPS measure, but if you look for a growing company with profit margins that cover its capital expenditures, that’s good enough.
A Trailing Twelve Month Price/Earnings Ratio (P/E TTM) of 15 and below.
I don’t always use PE ratio filters, and I don’t necessarily recommend that you do (although it can be a good way to determine if a stock you’re looking at is overvalued). Setting this parameter around 15 and below can help you narrow down your list if needed, but otherwise, I tend to set this filter so wide that it’s pretty much worthless.
A Reasonable Price/Earnings Growth (PEG) ratio.
Generally, companies with a good free cash flow don’t have debt problems, but if it’s something you’re concerned about, you can weed out some stocks by filtering out those with extremely high PEG ratios. It really depends on the company, though, as some businesses do fine with high debt loads, while in other cases, it’s a big red flag.
Scan of volume.
Should be greater than 100,000 shares per ticker, per day—but not more than 20 million as I don’t like illiquid stocks or overly-active stocks.
Remember also that numbers don’t tell the whole story…
Pair your scans with time spent reading press releases, following newsletters, digging into SEC filings, and just generally learning everything you can about the stock.
If you know where to do your research and what promoters to follow for tips on potential pump and dumps, you may find good opportunities to watch that haven’t yet come up in your screening program.
The goal of all these different filters is to create a watchlist of your favorite 20-50 stocks, depending on how many you’re able to track. Once you have your watchlist, refresh it every month by re-running your scans and give it a quick check everyday to look for strange movements.
Say you’ve got a cheap stock on your list that meets your free cash flow and growing revenue parameters. If you see that stock growing by 2% a day during your daily scans, that’s something you’ll want to keep an eye on.
Keep your watchlist up-to-date with new research, because this is the list you’ll come back to everyday to decide which plays you’re going to make. You can get as complicated as you want with your watchlist, but I recommend keeping things simple.
Make a few notes on the company and how you expect its prices to move, and include any information you have on when you want to either get into or out of the stock.
I hope this helps!
Editor, Penny Stock Millionaires