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Different Research and Analysis Schools of Thought

There are many different strategies for picking winning stocks, and perhaps you have heard of most of them.

From 'advanced technical analysis trading programs' to 'computer-assisted undervalued screens,' no one method has consistently proven effective with penny stocks.

You may as well have been throwing darts at the stock page in the newspaper!

For this reason, my company has developed our own proprietary research and analysis technique which applies specifically to the penny stock markets. Our methodology has been working exceptionally well, and has been fine-tuned over many years to further increase its effectiveness.

You are about to learn this long-secretive approach to picking winning penny stocks, called "Leeds Analysis." This technique has helped me make tremendous amounts of money, both for myself and for my subscribers.

However, I first ask that you review the different research and analysis schools of thought. I believe that it is very important to understand the numerous ways that investors have attempted to beat the market over time. The roots of my own secretive penny stock research and analysis technique stems from some of the best pieces of the following methodologies.

I feel that I must make one thing clear! The methodologies presented below were created to apply to higher priced equities, and when applied to penny stocks they often lose their relevance and accuracy. That is why myself and my team were forced to create our own approach to picking penny stocks, which is detailed in the next section of Understanding Penny Stocks.

Why don't conventional research techniques work for penny stocks, you ask?

This is because penny stocks are an animal all their own, and they play by significantly different rules. When investors try to take a strategy for investing and apply it to penny stocks, they are often surprised by how ineffective it can be.

The Different Schools of Thought

Technical Analysis

This uses patterns in the trading chart to try to uncover trends, and then predict the future direction of shares. It is also done in an attempt to uncover the best buying and selling opportunities and prices, as well as to predict the future activity of the underlying stock.

For example, when most stocks demonstrate what TA calls a 'cup and handle' pattern, they generally spike higher in the subsequent weeks. Thus, a cup and handle pattern may be a good buying opportunity.

What a technical analyst's desk may look like.

TA is significantly limited when applied to penny stocks, as the trading volumes and low investor interest (compared to most stocks) negates most analysis patterns. TA works best on well-followed, heavy volume shares like IBM or FORD.

"Conventional" TA can not and should not be applied to penny stocks. Instead, we have developed our own TA methodology for application specifically to penny stocks, and I detail it in upcoming sections of Understanding Penny Stocks.

Fundamental Analysis

This approach uses the company's financial statements. It looks at the financial numbers and ratios, as well as the corporate situation. We feel that fundamental analysis is a great starting point for screening and researching penny stocks, and that it is an effective method of finding the best companies to invest in.

Fundamental analysis looks at things from revenues and debt, to ratios like price/earnings and debt/equity. It then compares these with other stocks in general, and with direct competitors. Using fundamental analysis, you will also look at such criteria as management team effectiveness, press releases, brand recognition, barriers to entry for new competitors to the sector, among a host of other parameters.

Fundamental analysis is an excellent way to research and rank stocks. However, it becomes more difficult when dealing with penny stocks since it is often challenging to get access to all of the required information (and even when you do, you often need to be wary of the reliability of the facts).

Later, in the section on Information Sources, I detail how you can go about finding the information you need. In the next section, I explain to you exactly what fundamental factors drive the share prices of penny stocks based on our research.

Individual Concepts

The pure depth of fundamental analysis can be daunting, and as a result many trading concepts have sprung up from FA roots to take on lives of their own.

For example, some research methods simply take one fundamental concept such as price/earnings ratio, and use that as a way to compare investments. The companies with the lowest P/E ratios would be considered undervalued, while the ones with the highest P/E ratios would be overvalued. (One flaw with the approach in this example is that it assumes that all other factors are equal).

Another may look just at insider trading by itself. When insiders are buying, it must be a good time to load up on shares, and when they are selling, they must be privy to some bad news. (Insiders are just people, though, and often they can sell shares to raise money for their daughter's braces or a new car. Other insiders 'go down with the ship' and never sell their shares while the company sinks. In other examples, there may not be enough clear insider activity to reveal anything at all).

If you are sensing a trend here, it is that these 'Individual Concept' investment approaches are easily flawed. Most are fads that may have worked on certain stocks in certain market environments, but they quickly become exposed as ineffective once they are applied by individual investors. While traders may get lucky in some markets, then swear by the effectiveness of the approach, all of these strategies have proven to be unreliable from one moment to the next.

If any of these methods ever did prove effective (which they never will) it would not be long before every trader in the world was applying them, especially due to their simplicity.

Besides, why look at only one factor of a company, when you can look at all of them? True, you may be able to make some profits some of the time by seeing a small part of the picture, but revealing the entire picture will help you make more money, more of the time.

Themes

You may have heard of some of them: undervalued stocks, bottom-fishing, industry leaders, rolling stocks, momentum investing (the last of which is a spin-off from technical analysis methods). These are sometimes effective if the market cooperates, and painful when the market misbehaves.

Sure, it is great to pick up shares in undervalued stocks when the market has bottomed out and has just begun to rebound. But in that sort of a market, is it not also a great idea to be involved with bottom-fishing, industry leaders, momentum investing, stocks that begin with the letter 'D', and investment horoscopes?

Look at January to March of the year 2000. The three months leading up to the bursting of the dot-com bubble, you could not have lost money in the market if you tried! (If you did, please write to me and tell me all about it. I would LOVE to hear how you pulled that off!)

Perhaps I am being a little harsh. Sometimes these methods listed above can help you uncover some good shares. Just beware of their gimmicks, and only get involved when the market is just right. As well, know that there is no substitute to getting the entire company picture, as I detail in the next section.

The method I am about to explain to you has consistently outperformed the market.

Think of this weight loss analogy: there are a thousand different gimmick diets you could try, and although you may see some temporary results (which do not last), they do not work. The best way to lose weight is through changing your eating habits and lifestyle. In other words, doing the work required rather than going with a gimmick. Similarly, the best way to make money in penny stocks is to do the work required, rather than going with a gimmick.

I believe penny stock traders (even those that use a professional penny stock picking service) should examine the fundamentals as described in the next section on Leeds Analysis. This will help you to discover the best penny stock companies. Then use our specially developed technical analysis methods (also described in Understanding Penny Stocks) to find the best buying and selling prices of those shares.

Different Analysis Approaches		Why They Can Not Apply to Penny Stocks
Technical Analysis	Using trading charts and activity to attempt to predict future trends and prices	TA requires high trading volumes and predictability of stock activity, neither of which are common enough with the majority of penny stocks.
Fundamental Analysis	Using the financial results, assets, and earnings to predict the value of a company's shares.	Fundamental Analysis can be effective for penny stocks, IF it is applied with special considerations in mind. The fundamentals which drive the price of a blue-chip company are very different than those which drive a penny stock company, as detailed in Leeds Analysis.
Individual Concepts P/E comparisons, momentum investing, revenue growth comparisons, and dozens of other solo theories.	Comparing companies by one factor (ie- Price/Earnings Ratio).	This method is too shallow even for large-cap and blue-chip stocks, and is even less effective for penny stocks, which are a much more complicated beast.
Themes Rolling Stocks, Bottom-Fishing, Buy Low, Sell High, and other faulty 'quick fixes.'	Like fad-diets that don't work, theme-based stock picking is very marketable, but not very effective.	Like Individual Concepts mentioned above, Theme-Based techniques do not work to begin with, and have little chance of success when applied to the penny stock markets.

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