The Russell 2000 Index, which is a representation of the 2,000 smallest companies (based on market cap) from the Russell 3000, is typically a great gauge of how the smaller stocks have been performing.

Chart showing the performance of the Russell 2000 Index

In fact, the trading activity has been both interesting and telling. From December 4 until December 24, 2018, there were 15 trading days, 14 of which were negative (or bearish), seeing the index close lower each day than the level at which it opened.

If you are inclined to look back even further, perhaps October 2018, you'd be staring into the face of a 37% decline from the 1,742 peak level for the Russell 2000 toward the 1,266 V-shaped bottom on Christmas Day.

Since that point, besides eggnog and presents under the tree, the Russell 2000 has been showing off some holiday spirit. Specifically, that looks like a gain of 17% in an almost unbroken and direct uptrend, with only five bearish trading days over the 24 total days.

With the smaller and more volatile companies around us showing some strong momentum, plus having moved beyond the artificial and negative influence of year-end tax loss selling, the direction for the top-quality penny stock companies out there looks to be higher.

Penny Stocks to Watch

<See important disclaimer below.>

Alpha Pro Tech, Ltd. (APT)

Chart showing the share price performance of Alpha Pro Tech, Ltd. (APT)

Shares of Alpha Pro Tech, Ltd. (APT) spiked wildly higher in 2018 - when Ebola was in the news again - from $2.00 to $10.75 over a few days. Alpha Pro Tech protects people, products and the environment with protective and disposable apparel, so the price spike made sense at the time.  

While no one is hoping for a similar worldwide medical event to move the price of a stock, Alpha Pro Tech has been building its operational fundamentals very well even in the absence of such a serious event. The company is by no means a one-trick pony, and yes, any global contagions will suddenly push Alpha's solutions to the forefront in investors' minds, but relying on World War Z to turn a profit will always turn out to be a losing situation.

So, does the company have enough going for it, even if we don't approach some dark times? Absolutely, especially as Alpha Pro Tech is bringing in great top-line sales numbers, to the tune of $43 million last year. Ongoing demand for its products has enabled the company to achieve some pretty stellar numbers: earnings each year going back to 2013, earnings just about every quarter over that time, total assets of $34 million, and total liabilities of only $1.7 million.

As long as surgeons and dental assistants wear protective masks or infections need to be controlled, there will always be a need for Alpha's products. In fact, Alpha Pro Tech is a great recession-insulated business, given the importance of the solutions it offers. That is part of the reason the company has been able to generate a P/E ratio of a very strong 18 and net earnings per share of 23 cents.

Eagle Bulk Shipping Inc. (EGLE)

Chart showing the share price performance of Eagle Bulk Shipping Inc. (EGLE) 

This one is swinging from significant ongoing losses to three straight quarters of earnings. Once Eagle Bulk Shipping Inc. (EGLE) has strung together another quarter, assuming it is able to keep the operational trends moving in the right direction, it will be reporting an earnings gain for the entire fiscal year.

In other words, the company went from losing $223 million in fiscal 2016 to a loss of $44 million in 2017 to what now should be positive earnings for fiscal 2018, somewhere in the range of $6 million to $8 million, unless there is a major negative reversal in Q4.

Any analyst watching this stock will see how the operational momentum is shifting very strongly. We are positive on this one, in terms of its industry, the company's specific operations and its stock price potential. We do, however, expect a pretty significant recession, and if one does in fact arrive, it will put pressure on Eagle Bulk Shipping shares. So, why even discuss this stock here right now?

Well, for one, the brunt of the operational hardships has been both factored in, and suffered through, since about five years ago. Eagle Bulk Shipping reported big losses of $543 million in fiscal 2014, $224 million in fiscal 2016, and, even on "the lighter side," the cash bleed for 2013, 2015 and 2017 was $70 million, $148 million and $44 million, respectively.

Now, as Eagle Bulk Shipping has put up earnings in every quarter since Q1, these shares may be right at the turning of the tide. The financial position will get much better going forward, and even in a recession - assuming we even see one - we believe that the stock will move much higher toward and potentially beyond the current year-high mark of $6.14. 

Disclosure: This stock (EGLE) was also mentioned to subscribers of the newsletter.

Cemtrex, Inc. (CETX)

Chart showing the performance of Cemtrex, Inc. (CETX)

Over 350,000 shares traded on January 25, 2019. Typical volume for Cemtrex, Inc. (CETX) is closer to 65,000. Considering that the big day was matched with a strong 12% pop higher in price, it can be surmised that this may be the beginning of a trend rather than the end of one.

Cemtrex stock trades on the NASDAQ and is trading only at about 84 cents per share. This implies the stock will need to conduct a reverse split to maintain its listing requirements, which is very often, although not always, a negative for share prices. 

However, Cemtrex may be one of those stocks that will be able to get back to higher prices and out of the danger zone on its own, without having to do a share consolidation. From its price bottom at 54 cents on December 27, 2018, Cemtrex stock has climbed consistently.

Will this current uptrend continue? I think so, even to the tune of putting this stock out of the "share-price-risk-zone," which is triggered for any stock trading for less than one single dollar per share.  

Sandstorm Gold Ltd. (SAND)

Technical chart showing the performance of Sandstorm Gold Ltd. (SAND)

I am not a "gold bug," or one of those analysts who endlessly trumpets the merits of precious metals. I am an analyst, and everything I'm looking into (production costs, supply and demand trends, global currency generation, historical relationships between asset classes, portfolio holding percentages, etc.) is causing me to understand that gold should rise significantly higher.

By extension, an equity like Sandstorm Gold Ltd. (SAND) could benefit significantly. In my personal opinion, and taking into consideration other stocks in the same industry, I would be significantly surprised if Sandstorm Gold shares did not at least trade out of penny stock territory (over $5 per share) within a few months, if not weeks. Keep in mind that I'm wrong plenty of the time, but I thoroughly believe that Sandstorm Gold stock should move higher in a meaningful way before the snow melts and winter gets replaced by spring.

Disclosure: This stock (SAND) was also mentioned to subscribers of the newsletter. As well, Peter owns a small position in SAND shares.

BioDelivery Sciences International, Inc. (BDSI)

Technical chart showing the performance of BioDelivery Sciences International, Inc. (BDSI)

After years of significant losses (cash bleed of $57 million in FY 2013, $54 million in FY 2014, $38 million in FY 2015, $67 million in FY 2016), BioDelivery Sciences International, Inc. (BDSI) was able to generate net earnings of $5.3 million in fiscal 2017. Unfortunately, on a quarterly basis, the company has had several periods when it returned to its old ways, spending more than it brought in to the tune of $2 million to $3 million per month.

That was alarming to me (both as a business owner and as an investment analyst), but this corporation was saved by the very healthy balance sheet. The skinny: $116 million in total assets, $72 million of which can be considered "current," which means they are likely to be used - or at least have that realistic capacity - within the next 12 months.

This asset position is only relevant when compared to liabilities. Fortunately, the liability numbers are only $80 million, so at least BioDelivery will have several more quarters of "runway" before it will need to raise more funds.

Four Seasons Education (Cayman) Inc. (FEDU)

Technical chart showing the performance of Four Seasons Education (Cayman) Inc. (FEDU)

I prefer not to count on education-related companies. They are typically cash-losing businesses, which are either failing now, or they will be soon enough. In fact, it took a lot for Four Seasons Education (Cayman) Inc. (FEDU) to get my attention, and I was typically more demanding with the company than with most other businesses we analyze. 

Four Seasons Education shares recently fell hard, from $2.75 all the way down to as low as $2.25. Previous to that, they were trading at $4.50 in late 2018 after tumbling from $5.25 in mid-2018. Prior to that, shares were at $9 in early 2018 and as high as $10 around the time of the IPO in November 2017.

Thus, Four Seasons Education has done little else besides decline since it came into existence. Additionally, as you've heard, you shouldn't try to pick the price bottom, or catch a falling knife (which this stock certainly has been thus far), before you are certain that the shares have bottomed already.

However, our outlook on Four Seasons Education is based on the current valuation metrics. Since we are primarily using fundamental analysis in this situation, we feel fine about looking into Four Seasons Education at these prices, assuming new shareholders will have a long investing window of a few quarters, as new shareholders typically do.

The revenue numbers are growing rapidly: $14.8 million in FY 2016 followed by $30.3 million in FY 2017 and $45 million in FY 2018. P/E ratios are often a reflection of growth, so the P/E of only 22 - given its top-line growth rate - is very attractive. Based on the growth the company is currently achieving, we would typically expect its P/E to be at least 30 to 40. One way to reach that P/E would be via a significant price increase in Four Seasons Education shares.

In the last fiscal year, the company achieved net earnings of $5.5 million. Its balance sheet is impressive as well, with $125 million in assets and only $21 million in liabilities. Consider treating the recent 15% single-day price decline as a potential buying opportunity, and I believe investors with a long term time frame outlook will outperform those who are looking for shorter or quicker gains.

Turquoise Hill Resources Ltd. (TRQ)

Technical chart showing the performance of Turquoise Hill Resources Ltd. (TRQ)

Yes, I've talked about Turquoise Hill Resources Ltd. (TRQ) ever since November 2018, but this one is finally starting to play out exactly as originally anticipated. In fact, since the December 24, 2018 low we mentioned in the Russell 2000, shares copied the Index's V-shaped bottom, quickly recovering nearly 20% in two weeks.

Some slight weakness followed, which has since been overpowered, ensuring that Turquoise Hill stock is now officially in an uptrend. The near $20 spike in the per-ounce price of gold, plus significant gains across all other precious metals, acts to reinforce the unloved stock at current levels. The shift in the hyper-unloved mining sector only implies that further price gains are coming.

Energy Focus, Inc. (EFOI)

Technical chart showing the performance of Energy Focus, Inc. (EFOI)

This is a turnaround play. With the corporation's top focus being on achieving break-even operating results and several initiatives in place that are expected to lead to a return to profitability, Energy Focus, Inc. (EFOI) may be earning the recent price appreciation that has lifted the shares from 55 cents to 75 cents.

We believe that this uptrend is just getting started. One caveat we'd add is that the trading volume in Energy Focus shares is so low that it makes reliable analysis a bit more problematic. However, we do expect this one to perform well, although we won't be seeing a return to the stock's former $29 prices any time soon.

The Bottom Line

Watch for the momentum of the Russell 2000 to keep up, which implies more realistic valuations for some of these high-quality penny stocks we've put through the 29-point Leeds Analysis. When we say "realistic valuations," in our opinion, that means higher trading prices for each of the equities discussed above.

How to Buy Penny Stocks

To get started investing in these types of assets, you'll need a broker. Some brokers are better for penny stock trading than others. If you are interested in getting started with penny stocks, you can take a look through Investopedia's list of the best brokers for penny stocks. The list can give you an idea of what the leading brokers in the space are so you can choose the right broker for your investment needs.

Peter Leeds is the author of several books, including the international bestseller, "Penny Stocks for Dummies." He and his team also issue a newsletter devoted exclusively to penny stock picks and analysis, as well as a popular YouTube channel – PeterLeedsPennyStock. 

<Important Disclaimer: Penny stocks are volatile and can generate catastrophic losses. Price levels in this article are hypothetical and do not represent buy recommendations or investment advice. Keep in mind that it's your responsibility to make trading decisions through your own skilled analysis and risk management. The author did not hold a position in any of the stocks mentioned at the time of publication.>