Zynga Set to Rocket, but Beware Other Penny Stocks

NEW YORK ( TheStreet) -- Penny stocks, according to different textbooks, are labeled as stocks that trade at relatively low prices and market capitalizations. However, there is some confusion in this, because some of the lower-priced stocks are massive companies with real revenue. Well, how does this tie in with institutions not being able to trade or be invested in some of these "penny stocks" and with the average retail investor/trader?

An epic example is the day Bank of America ( BAC) almost became a "penny stock." It plunged under $5 last year. Something terrible would have happened to that stock had it closed under $5. The day it plunged to the $4.90's, I had my finger over a 10,000 share short order of Bank of America! But why? One known rule is that most mutual funds and institutional money cannot be in stocks that are under $5.

I was waiting for it to close under $5 and this would trigger a massive computerized selloff by these funds; and I would profit huge from this. As the stock closed that day at $5.01, I switched to a long position instead, because they weren't able to close it under $5; the stock soared the next day and following weeks to the $7's, as the bottom had been put in.

Apparently, millions of other traders agreed with me that day; now the stock trades at $12 to $13. Not a bad return just knowing how "penny stocks" and institutional money flow works.

Another example of a legit "penny stock" is Zynga ( ZNGA), with a billion in revenue and a growing online gambling market that is being legalized. This stock trades at $3.50, we entered at $2.50. Here are three reasons for our entry.
  1. Zynga could be a potential buyout target for big social networks.
  2. Management at Zynga are laying off hundreds of employees and closing offices and games
    that don't do as well, and are trimming overhead and expenses.
  3. The stock is consolidating, momentum had changed to
    the upside, possible move back to the $6's or higher.
The "penny stocks" you want to avoid are the "pump and dumps." These are companies like Clean Power Concepts ( CPOW), which at one point Google Finance said was a $150 million company. It traded up 400% in three to four days and then got crushed as the schemers and promoters sold their shares. The office was literally located in a barn in Canada at this address that you could look up on Google maps street view: 1620 mcara street, Regina, Saskatchewan, Canada.

Typically there are disclosures at the bottom of PR releases for these stocks indicating that the companies are being rewarded, via cash and equity, to promote the shares. Also you will see disclosure mentioning "forward looking statements." Next the stock rises, and they sell their millions of shares into the upward move, leaving sucker retail traders holding the bag.

An example of a hot pump and dump that is soaring, and will get crushed very soon is Goff ( GOFF). This is a paid pump and dump as well. Stay away, unless you can find shares to short it for big profits after it finishes climbing and rolls over to the downside.

Trading these types of solid companies and profiting in a huge way is just being smarter than the average "Joe" who is trading from his iPhone at work and is easily distracted, or than your neighbor who is a finicky daytrader who "dabbles" every now and then in the stock market.

If you follow a specific strategy, such as the ones offered through mentorships at www.csquaredtrading.com, then you can learn to narrow your universe of stocks and stack the probabilities in your favor as you fight the "Retail Joe" trader, and not the institutional money.

-- Written by Ben Brinneman in Charlotte, NC

At the time of publication, the author was long ZNGA, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Trader Ben Brinneman, featured on MarketWatch, Bloomberg and Reuters, resides in Charlotte, NC and is the owner of C Squared Trading. Ben Brinneman started his career trading bonds for U.S. Bancorp and was an analyst for a wealth management firm. He was mentored by some master traders on the stock market and how to profit week in and week out. After assembling custom trading plans for other traders and friends, it was at that point he decided to create C Squared Trading, and teach other retail traders and investors the methods that had brought him success trading in the stock market.

Brinneman and his team have taught hundreds in a one-on-one mentorship setting via Skype or live in Charlotte. C Squared Trading's mentorship programs are built for those that are serious about learning how to maximize their trading by learning from an expert trader in a live setting.

You can also follow some of their free trades and tips on Twitter. Please visit C Squared Trading for more information on its mentoring program.