In late December, the Russell 2000 Index began a nice "V-Bottom" bounce, and it has been rising well since then. However, last month, I showed you that we were entering a strong resistance zone. My comments on the chart were, "Tired/Over-Extended Risk/Caution Zone" and "Is This a Top?"
This index has been playing out exactly as anticipated (by you and me), with bullish momentum giving way to a few failed breakout attempts. Now, many financial analysts are finally changing their tunes to agree with what you already knew.
The Russell 2000 can be considered a diagnostic indicator for many of America's smaller corporations, but we are seeing similar activity playing out across several of the broader markets and indexes. In fact, comparing the Russell 2000 to the trading activity of the Dow Jones Industrial Average (DJIA), from 12 feet away, the charts look almost identical.
Momentum has slowed. Price direction has become sideways to down over the past month. Volatility has increased (often a sign of a market top or bottom). In fact, even as many on the Street believe that the markets are roaring higher by the hour, the Russell 2000 is lower than it was five days ago, or even a month ago, or even six months ago.
This common misunderstanding of the strength of the market is potentially setting up many investors (who don't read this blog) to be at risk. The detachment between the beliefs of the majority and reality is causing complacency, with far too many investors poorly positioned for what is to come next. Choosing greed over fear can be great (and profitable) … but only sometimes. Unfortunately, "sometimes" has a shelf life.
Penny Stocks to Watch
<Disclosure: Many of the stocks mentioned above (and below) were also profiled, traded or otherwise discussed in the Peter Leeds Newsletter. As well, Peter may own shares in some of the investments mentioned, in which case that fact will be clearly indicated. See below for an additional important disclaimer regarding penny stocks.>
One Stop Systems, Inc. (OSS)
One Stop Systems, Inc. (OSS) is a financially solid, rapidly growing company, and its hyper-volatile shares currently sit at what I believe to be undervalued prices. Seven trading days ago, One Stop Systems stock was trading for as much as $3.90 per share, and it has since shed nearly half that value.
A relatively smaller company, One Stop Systems boasts a market cap of "only" $27 million and has a forward-looking P/E ratio of 12.6. Annual revenues came in at $37 million, leaving the company with 16 cents per share in cash alone. One Stop Systems engages in the design, manufacture and marketing of computing systems and components.
Typical activity is about 120,000 shares changing hands per day, but after the massive spike and drop over the past couple weeks, the daily average volume is over 800,000. There are a lot of eyeballs on this one right now, which is part of what is driving the significant moves.
Eastman Kodak Company (KODK)
Within two weeks – when we first spoke about Eastman Kodak Company (KODK) one month ago – shares moved from $3.03 to reach as high as $3.79. Those are respectable gains, but I truly believe that this one has much higher to climb.
The good news for anyone who feels they missed the boat: shares have sold off to what are, in my opinion, compelling accumulation levels. As Kodak shares climbed for their run at higher prices, they formed a bearish engulfing pattern (a very negative set-up), which can be seen from space and on a Japanese candlestick trading chart.
Shares then fell, as they typically will after such a negative indicator. On the way lower, a three black crows set-up formed over the trading period from March 18 to March 20 (another bearish pattern).
Sorry for all the "chart talk," but I'm getting to the best part right now. At the time of conducting this analysis, the most recent three days (March 26 through March 28) have created one of the most bullish candlestick chart indicators – a three white soldiers pattern. This often becomes a rewarding and significant uptrend.
Just a refresher from last month so I don't have to type it again: Kodak has rebuilt itself as a complex technology corporation, with popular solutions for various aspects of its industry – commercial print, electronic displays, packaging, commercial films, 3D printing and various other fronts.
While having such a disperse focus may be a negative for any company, the good thing about the spaces in which Kodak operates is that many of them, including 3D printing and electronic displays, are rapidly growing industries. By building the solutions on the front lines of several up-and-coming technologies, Kodak is in a great position to grow rapidly.
In fact, I am already seeing some compelling operational results from Kodak's latest quarterly numbers. The corporation hit $1.5 billion in sales for fiscal 2017, and that translated down to $96 million in net earnings. On a quarterly basis, the company boasted net income of $19 million in the most recent three months.
Arcimoto, Inc. (FUV)
Do most people want zero-emission public transport? Or specialty electric vehicles, like three-wheelers for first responders? If Arcimoto, Inc.'s (FUV) top-line (revenue) is any indication, the answer is a resounding "YES." The company's backlog of 3,018 pre-orders has a story to tell, and investors who are listening often become shareholders.
Since discussing Arcimoto last month, shares spiked as high as $5.28, escaping penny stock territory (anything below $5 is a penny stock according to the SEC definition). However, Arcimoto shares returned those gains, dipping back as low as about $4.50 over the past two days.
The trading chart recently displayed a very bullish three white soldiers pattern, rising on very heavy trading volume. That increased trading activity demonstrates the level of commitment behind any move – more volume equals more commitment.
Arcimoto is set to report its full-year 2018 financial results on April Fool's Day. I am expecting an extension of its current trends of growth in revenues, gross profit and backlog of orders. Whether or not green vehicles are your thing, you almost certainly like investment profits. Arcimoto stock may be a great place to start.
Energy Focus, Inc. (EFOI)
Energy Focus, Inc. (EFOI) is working to return to profitability through cost-cutting measures, growth in sales and an evolution/rethink of its operating strategy. Sales numbers have been hitting record levels, and its share buyback plan is keeping a floor under the shares during this corporate turnaround.
Prices in December of approximately 55 cents were almost certainly the bottom, and since then, Energy Focus stock has welcomed a new trading range above $1 per share. Based on that price momentum, plus all the operating improvements as well as balance sheet strength (zero long-term debt), Energy Focus is well positioned to resurrect ongoing profitability.
Energy Focus has over $7 million in cash, and considering that it has 12.07 million outstanding shares, that works out to 58 cents each. The company's current ratio is a very strong 3.87, demonstrating that it has the financial position to be aggressive with its operational plans.
The industry (energy-efficient lighting systems) should continue to grow, taking Energy Focus with it. The company's military maritime lighting products, industrial solutions, commercial systems, and product research and development are all seeing their market share footprint expand.
Arc Document Solutions, Inc. (ARC)
Arc Document Solutions, Inc. (ARC) did not disappoint when it released its Q4 and fiscal 2018 results. As I mentioned last month, once the company produced net earnings over the final three months, that would represent a reported profit over every quarter for the entire year, and thus the entire 12-month period would show a strong profit position.
Net earnings on a quarterly basis are good, but once a company achieves the same measure of success over an entire year, that puts it on a higher level. Earnings in any single quarter may be an outstanding one-time result, but annual profits are more likely a demonstration of ongoing and stable growth.
As I mentioned last month, "…simply returning to annual earnings does not mean the stock price will quadruple. However, positive income results will be one of several major price drivers for shares of Arc Document Solutions, along with a few other notable metrics: market share gains, expected annual earnings per share (EPS) of 15 cents to 18 cents, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $52 million to $55 million."
As mentioned, Arc Document Solutions was expecting EPS of 15 cents to 18 cents for the year. Now the official results have been reported, and based on its net profit ($8.87 million) divided by 46 million outstanding shares, the company blew away estimates with results coming in at 19.8 cents per share.
Lantronix, Inc. (LTRX)
Lantronix, Inc. (LTRX) is a stock we selected for PeterLeeds.com subscribers on May 24, 2017, when it was trading at $2.56. Last August, shares hit $6.47, but the story doesn't end there. More recently, Lantronix stock has dropped back to what I believe is an undervalued price range. Now may be the time to take this one for another run higher.
Lantronix provides Internet of Things (IoT) solutions: data management, network connectivity and information technology management. When you think of growing industries, IoT should be included in that thought. The Internet of Things has been around and has been developed for much longer than most people realize … BUT Lantronix still has the majority of its growth ahead of it.
Last year was the first in five showing a net profit, and the company did so to the tune of $680,000. Four of the past five quarters have now shown a profit.
Groupon, Inc. (GRPN)
This corporation is part of the way through a significant transformation. As Groupon, Inc. (GRPN) attains more operating victories, it tightens up its financial results while expanding its brand presence.
Three years ago, Groupon stock was trading above $8.00 (more than double the current $3.50 price). Of course, the fact that the shares have declined is NOT a reason to consider them a better value or a compelling investment.
However, the actual reasons to expect strong performance are multi-various: improving operating efficiencies, rising profit margins and cost reductions. Operating cash flow for fiscal 2018 came in at $191 million, and after all expenses, the net income was $2 million. Groupon finished the year with $840 million in cash and a gross profit of $1.3 billion.
The company has been "remaking" itself for over three years now. For a corporation the size of Groupon, this turnaround process takes much longer than most would typically expect, but the great news is that the process is much more than halfway done.
It is like that old Mensa riddle – How far can a dog run into the woods? The answer? Halfway. Because then it is running out.
Orion Group Holdings, Inc. (ORN)
One of the most important aspects of a company like Orion Group Holdings, Inc. (ORN) is its backlog of work. For Orion, that metric came in at $441 million as of year end.
This corporation had some weak numbers reported on its annual financial results, missing on both the top (revenue) and bottom (earnings) lines. A big part/cause of that, although not the only factor, involved an off-balance-sheet, one-time, non-cash, unusual impairment charge of $69.5 million to its goodwill line item.
In English, that means the company adjusted the value of one part of its balance sheet so that its asset position would more accurately reflect a more reasonable and accurate value. If you think your house is worth $1 million, then you recognize it is only worth $300,000, you don't actually lose or spend $700,000, but your net worth instantly took a major hit.
Thus, after the hit taken from reporting the weaker numbers, Orion Group shares have "readjusted" to much lower levels. Since one-time and unusual items, by their very nature, are NOT things that happen again, you can assume that Orion Group stock will get back on track going forward.
Shares are temporarily trading at very compelling valuations. As the drama from the massive charge gets absorbed, forgotten and fades away, shareholders getting involved at these "moment in time" prices may be looking pretty wise a few months from now.
The Bottom Line
This is a time to greatly enrich yourself by positioning into very specific stocks and types of companies. The winners will be the ones that will do well due to, and often in spite of, a quickly fatiguing market.
The risks for the majority can be an outsized opportunity for the minority. The gains to be had will fall to the few who are paying attention. The great news for you? Paying attention does not take any extra work.
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.>