Penny stocks are stocks with very low stock prices (that is why the name) and low market capitalization. Institutional investors generally avoid these stocks as they are considered risky because of low liquidity and high bid ask spreads. In fact a number of large funds have rules to avoid stocks below a certain price and market capitalization threshold. Though penny stocks have a higher risk profile, they can also generate huge returns if some favourable news happens to the company. The Securities and Exchange Commission (SEC) defines a penny stock as a security that trades below $5 a share, is not listed on a major national exchange and fails to meet other specific criteria. In the article below, we look at the most popular penny stocks (that were trading at less than $1 at the end of September) in the energy sector among elite hedge funds.
Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).
Gastar Exploration Inc. (NYSEMKT:GST) is an exploration and production company with its main business being development of natural gas assets in North America and Australia. Some large hedge funds added this stock to their portfolio during the quarter. Citadel Advisors bought 17,997 shares of the stock taking its total holding to $63,000 while Bridgeway Capital Management kept its $350,000 position unchanged. Advisor Group and Philip Hempleman’s Ardsley Advisory Partners were some of the other large hedge funds holding this stock. The stock has climbed up by more than 37% in the last 5 months and currently has a market value of $184 million. The company reported $13 million in reveneus for the third quarter, which was up 7% quarter on quarter. Net loss of $3.8 million was reported with a production of 5,900 barrels of oil equivalent (“Boe”) per day. The number of funds from our system, long in this stock remained constant at 9 quarter over quarter. They held 13.2%of the company’s float as of September 30th.