I did an undergraduate degree in history…years ago. Aside from hearing the old adage, “history is bunk” I would run into people who wondered why I even studied history. After all, the past is over, all you have to do is look at it, learn from it, and move onward and upward.
But, I argued, everyone views history in a different light. For example, you could look at the events in history as cyclical or linear, and you could interpret it from any number of different angles, including: religious, capitalist, feminist, Marxist, or even a Bill O’Reilly point of view.
Everyone will look at a historical event and decide why it happened based on the way they view the world. The same can be said for economics…and by extension, the stock market and investing. Perhaps you subscribe to the Classical School, or Mercantilist, or Keynesian School – or maybe not.
As a penny stock investor, one of my favorite theories is Darwinian economics. Not because I love Darwin one way or the other, rather, I would think that if the business culture is ‘survival of the fittest’ – penny stocks wouldn’t have a prayer. They’d be gobbled up by a larger, leaner, faster stock.
And yet, there is plenty of room for the penny stock to roam, graze, and grow.
Not a big fan of Darwin? It’s okay to believe in Darwinian economics even if you don’t think you had a tail. Conversely, if you think your ancestors did swing from trees you don’t need to subscribe to Darwinian economics.
In lieu of delving too deeply into the constructs of economic theory, I think we can simply say that in Darwinian economics, good businesses adapt based on changing circumstances.
After all, Darwin hypothesized “the survival of the most adaptable,” not “the survival of the fittest.”
And if ever there was a time for penny stocks to show they can adapt and grow, it’s now. While 2008 will be remembered as one of the toughest years on record, I think 2009 will be the year when penny stock investors can see just how prudent the management team of their favorite company is.
Just like their large-cap peers, during a recession, penny stock companies will need to cut costs, restructure, and streamline operations. Having said that, I think (good) penny stock companies have to be adaptable even in the most bullish of markets.
But why do penny stocks survive, and thrive in the midst of larger companies? Large companies are usually highly diversified, focusing on developing more advanced products to meet the needs of demanding, high-end customers.
While not always the case, when the level of technological progresses beyond what customers actually need and use, the opportunity for an upstart to come in with something that has a more specific target audience, is less expensive, and easier to use.
Once the smaller penny stock takes root with its target market, it can then improve on the product and take away market share, or in some cases hobble the leader when it marches upwards.
While there aren’t too many penny stocks crippling their large-cap competition in the current economic climate, there are penny stocks that are thriving.
For example, Art Technology Group (NASDAQ: ARTG, Stock Forum) announced last week that full-year revenue was up 20% at $164.6 million, and the company also swung to full-year profitability of $3.8 million.
ClickSoftware Technologies (NASDAQ: CKSW, Stock Forum) is another great penny stock bucking the trend. Earlier last week, CKSW announced that total revenues for 2008 grew 31% over 2007 to $52.3 million, with consolidated net income up 211% at $8.1 million, or 28 cents per share.
Excellent, undervalued penny stocks that can adapt and thrive in virtually any economic cycle are out there…some in plain sight.