Investing in penny stocks has acquired something of a bad rap on Wall Street. Speculative traders certainly have a host of horror stories to share about these so-called "penny" stocks, securities of tiny companies priced below $5. Many of these companies hold next to nothing in assets, have limited operating histories, and don't even file their financials with the SEC, making them dangerously high-risk investments. But don't be so quick to rule out a stock based on size alone--not all penny stocks are created equal.
Single-digit stocks that trade on traditional securities exchanges and are transparent in their business practices can make perfectly sound investments. Sometimes, penny stock companies are viable operations that simply had a run of bad luck--perhaps they're carrying a heavy debt load, recently lost a major client, or are simply dealing with the repercussions of a negative industry trend. And since institutional investors don't usually trouble with these microscopic stocks, there's that much more opportunity for individuals to find good values.
So how can you tell which penny stocks are worth pocketing? One way to decide is to have a look at what the insiders are doing. A company's management team is privy to a good deal more intel than the average investor--so if they're snapping up their own stock, it could be a good sign of things to come.
Here's a list of 5 stocks under $5 seeing insider buying. Insider trading data sourced from AOL Money.
Interactive Chart: Press Play to compare changes in market cap for the top six names mentioned below. Note: The numbers on top of items represent the forward P/E ratio, if available.
The list has been sorted alphabetically.
1. BPZ Resources, Inc. (BPZ): Oil & Gas Drilling & Exploration Industry. Market cap of $561.38M. Monday's closing price at $4.86. Richard James Spies (COO) bought $82,198 worth of stock between 12/14 - 12/16. Short float at 14.95%, which implies a short ratio of 12.49 days. The stock has lost -41.59% over the last year.
2. Globalstar Inc. (GSAT): Wireless Communications Industry. Market cap of $432.1M. Monday's closing price at $1.49. James Monroe III (Chairman) bought $235,200 worth of stock between 12/20 - 12/23. Short float at 4.73%, which implies a short ratio of 5.94 days. The stock has gained 58.51% over the last year.
3. Ener1, Inc. (HEV): Industrial Electrical Equipment Industry. Market cap of $616.52M. Monday's closing price at $3.79. Boris Zingarevich (Director and 10% Owner) bought $3.63M worth of stock on 12/7. Short float at 5.12%, which implies a short ratio of 12.88 days. The stock has lost -43.52% over the last year.
4. MRV Communications Inc. (MRVC.PK): Semiconductor Industry. Market cap of $281.35M. Monday's closing price at $1.79. Charles Gillman (Director) bought $999,913 worth of stock between 12/2 - 12/15. Short float at 1.67%, which implies a short ratio of 6.74 days. The stock has gained 152.11% over the last year.
5. Valence Technology Inc. (VLNC): Industrial Electrical Equipment Industry. Market cap of $255.96M. Monday's closing price at $1.77. Carl Berg (Director and 10% Owner) bought $4.51M worth of stock on 12/3. Short float at 10.86%, which implies a short ratio of 6.65 days. The stock has gained 92.39% over the last year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.