Hedge Funds Say These Penny Stocks are Poised to Explode

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Penny Stocks represent a very risky investment, but also one that might provide a great amount of profits if chosen wisely. However, with literally hundreds of thousands of penny stocks on the market, it’s really difficult to know which ones represent real companies that might gain more ground in the medium- to long-term, and which ones are just schemes to manipulate you into wasting money.

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Here’s where we come to help you. One of the most certain ways to pick penny stocks is to follow hedge funds into them. Hedge funds don’t play around with a couple of thousands of dollars when it comes to buying a stake in a company, so they must conduct due diligence on each stock they intend to buy, which is why imitating their picks in the penny-stock space is a safer way to get some profits. Another idea is to follow hedge funds into their small-cap ideas, which the Insider Monkey strategy is all about. We have determined that imitating most popular small-cap stocks among hedge funds, can help retail investors generate double-digit annual alpha by analyzing their 13F filings between 1999 and 2012. Based on our research, we have developed a small-cap strategy that involves imitating 15 most popular small-cap stocks among over 700 hedge funds and it has returned over 118% in the last three years, beating the market by more than 60 percentage points (read more details here).

With this in mind, we have compiled a list of five stocks that trade under $1 per share, which are the most popular among the investors from our database. On the fifth spot is is LeapFrog Enterprises, Inc. (NYSE:LF), a $64 million developer of toys and educational entertainment for children, whose stock has slid by 80% since the beginning of the year. Among the hedge funds we track, 17 were bullish on the company at the end of June, holding $84.14 million worth of stock, which represented 8.50% of its outstanding stock. David E. Shaw‘s D.E. Shaw held the largest stake in LeapFrog Enterprises, Inc. (NYSE:LF) at the end of June, disclosing 1.65 million shares in its latest 13F filing, followed by John W. Rogers’ Ariel Investments, which initiated a position during the second quarter containing 917,500 shares of LeapFrog Enterprises, Inc. (NYSE:LF).

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