Value Penny and Micro Cap Stocks

While most investors clearly understand the difference between value investing and growth investing in the large cap stock arena, they often only associate investing in micro cap or penny stocks with growth. Indeed, the raison d'être for taking a shot at a small hot stock is to see the company grow exponentially and realize triple digit gains, therefore the exclusive association of micro cap stocks with growth is understandable.
There are, however, value opportunities within the micro cap stocks that will grow substantially. The reasons for the penny stock to have temporarily fallen out of favor can be various: one bad product launch, one bad quarter, loss of a major customer, FDA delay, or management change. The trick here is of course to determine that the setback is indeed temporary and that otherwise the small company is going to continue on its growth trajectory. This value strategy to growth penny stocks can yield double the return associated with penny stocks as the investor will be buying a hot stock at a discount.
A good valuation metric to use in such a case is to look at the book value of the company. If the book value is near or above the stock price, then one can be assured that the liquidation of assets will protect one's downside (in case the situation that created the discount becomes permanent).
Closely related to book value is the debt of the micro cap stock. Especially beware of debt that is off the books for in that case if the expected turnaround does not happen all the underlying assets will be gobbled up by the creditors.
Since Wall Street does not provide any coverage on these value opportunities in the micro cap stocks, the research gap is filled by many online resources. There are many newsletters that provide an early peek into such out-of-favor companies by sending penny stock alerts to their subscribers. If you are not familiar with any, an excellent place to start is www.hypergrowthstock.com where you will hear both about growth and value opportunities for the long term hold and short term trade in micro cap stocks.