The Art of Picking a Penny Stock?

Summary: Whether you are looking at a penny stock or a blue chip behemoth, there are details you should take into consideration before investing.

Should Wiley E. Coyote ever get into buying stocks, I have no doubt he would stack his portfolio with shares of ACME. I'm just not so sure any savvy penny stock investor should follow the economic advice of a coyote. Investors of the two-legged kind, whether they're looking at a penny stock or a blue chip behemoth, tend to take a myriad of details into consideration before investing. And so they should. But a recent study suggests that investors of every stripe take mental short-cuts when it comes to investing...at a time when they should be more rational. Wall Street gurus and penny stock investors alike it seems, are more likely to purchase newly offered stocks that have an easily pronounceable name, say a pair of Princeton University researchers. Adam Atler and Danny Oppenheimer found that a stock's performance immediately after an initial public offering (IPO) appears to be linked to how easily investors (penny stock or otherwise) can pronounce its name and stock ticker symbol. Danny Oppenheimer, commented, "These findings contribute to the notion that psychology has a great deal to contribute to economic theory." The two said the effect also extends to ticker symbols. For example, all things being equal, a stock with the symbol BAL should outgain a stock with the symbol BDL in the first days after an IPO. "We looked at intervals of a day, a week, six months and a year after IPO," Atler said. "The effect was strongest shortly after IPO. For example, if you started with $1,000 and invested it in companies with the 10 most fluent names, you would earn $333 more than you would have had you invested in the 10 with the least fluent." Oppenheimer acknowledged that their findings do not tell the whole story about the post-IPO success of a stock, not are they good indicators of long-run performance of a penny stock. "You shouldn't make changes to your stock portfolio based on our findings. The primary contribution of this paper is to add a piece to the jigsaw of understanding how the markets operate," said Oppenheimer. So, what does this mean for the green and seasoned penny stock investor? It means you should still take an exhaustive look at any company you're interested in. It also means that, in the early stages at least, it doesn't hurt to find a company with a catchy name and ticker symbol to boot.