My parents love a good garage sale…
They show up an hour early and take their time to look everything over.
My father won’t hesitate to offer you $1 for that $10 toaster.
He’ll barter with you until you settle on two bucks.
Then, he’ll whip out a crisp $100 bill and ask if you have change!
Every once in a while, he scores huge.
Though it’s usually at the end of the day when the seller just wants to be done, and $100 items are going for $5.
Sure, I found my dad’s haggling a bit exasperating.
But today, I often find myself doing the same thing in the stock market, where $100 stocks often sell for less than $5.
And that $5 is the magic number.
Because back in 1992, the SEC created a rule around “$5 stocks” that accidentally gave Main Street one of its few advantages over Wall Street.
It’s a loophole that you can exploit today, repeatedly, for market-beating profits.
Again, this was all an accident.
You see, 30 years ago, the SEC noticed that there were far too many pump-and-dump schemes with cheap stocks.
Think Wolf of Wall Street and boiler room scenarios where an aggressive salesperson is pitching a $1 stock.
And yes, the SEC was correct. There was a big problem with these pump-and-dump stocks.
So they created a rule to stop the problem: SEC Rule 3a51-1 — or the “Penny Stock” rule.
This rule stated that any stock under $5 is considered a penny stock.
They declared that these penny stocks were speculative. That big institutions and funds should not trade them because they could move the price too much with their billions of dollars.
So these stocks are off-limits … to the big firms.
That’s the rule.
These funds have a duty to invest their customer’s capital into sound investments, not speculations.
But it’s a silly rule.
Why?
Because the price of a stock says very little about a company’s actual health.
Let me explain…
Say you are the CEO of a company and want to raise $1 billion by selling shares.
You could sell 1 billion shares for $1 each … or 10 million shares for $100 each.
Either way, you raise $1 billion.
Yet in the eyes of the SEC, that $1 stock is “speculative,” while that $100 stock is “safe.”
Again, that’s silly.
It’s like Yogi Berra once quipped: “You better cut that pizza into four pieces because I’m not hungry enough to eat six.”
The size of a company is the pie.
The shares are simply the size of the slice.
But there’s an arbitrary cutoff for Wall Street investors. It’s based on the price of a share, not the total size or quality of a company.
It’s as Ronald Reagan said: “If you think the problems we create are bad, just wait until you see our solutions.”
And yet, we should thank the government for such a silly solution!
Because SEC Rule 3a51-1 is a massive gift to you and me.
While big Wall Street firms are barred from investing in stocks priced under $5, YOU ARE NOT.
Sure, your broker is required to tell you that the stock is speculative and urges caution, as they should. But you are not banned from investing in these $5 stocks.
Therefore, it’s a rule that lets Main Street investors in, while keeping big money out.
And that’s truly a wonderful thing for you.
The “$5 and Under” sector is one of the few places where Main Street has unfair advantage over Wall Street.
Because ultimately, it’s a loophole in the system.
A glitch.
An anomaly.
You can get in under $5. They can’t…
Until that stock trades over $5.
Once that happens, the big Wall Street firms with their billions of dollars can finally scoop it up.
And what happens to a stock when billion-dollar funds start pouring money into them?
The stock soars higher.
That’s why stocks moving over $5 may not stop going up until they’ve gone to $10, $20 or $100.
Apple.
Amazon.
Tesla.
These were all once “penny stocks”…
Until they weren’t.
Until they soared over $5 and kept marching higher, making investors well over 10,000% gains.
Can you see why $5 is truly a magic number?
This “$5 rule” creates 10,000% opportunities for you and me.
And today, January 29, is a great time to invest in these $5 stocks.
Why?
First, because over the last few years, a lot of $100 stocks have dropped under $5 — hundreds of companies.
Second, while the S&P 500 has been hitting new highs, the Russell 2000 Index (small-cap stocks) is still down 20% from its highs.
That’s the largest drawdown that small caps have had relative to the S&P 500 at an all-time high.
Following the three prior record drawdowns, small caps went on to outperform large-cap stocks.
With that said, buyer beware.
Many of these stocks are still garbage. They are not worth $5 … let alone $0.10.
But some are truly great companies, like $100 items sold for $5 at a garage sale.
(I’ll show you how to sort out the good from the bad in a moment.)
The best reason why today is a great time to buy these $5 stocks is because we are entering a new bull market.
Back in November, stocks finally rose 20% from their lows. That marks a new bull market, and on average, these bull markets last for over five years.
Here’s what’s interesting.
In the first three years of a bull market, the $5 small-cap market outpaces the large-cap stock market…
100% of the time.
So investing some of your money into this $5 stock arena is a huge opportunity for you.
That’s what I’ve been doing with my personal portfolio.
As I mentioned earlier this month, my top investment idea for 2024 is Wrap Technologies (Nasdaq: WRAP).
I wrote about it when shares were trading at just $2.80. Since then, they’ve already run to $3.80. You can get the full write up here.
But that’s just one potential big winner in the $5 stock world.
To find more, I’ve turned to Banyan Hill’s resident expert in these $5 investment opportunities, Adam O’Dell.
Adam created a system to find the hidden gems of $5 stocks that are about to soar higher.
For instance, in April 2022, amid the throes of the bear market, Adam discovered IMARA Inc.
Shares of this biotech company soared 460% in 10 months, culminating with their acquisition by Enliven Therapeutics (Nasdaq: ELVN).
Terns Pharmaceuticals (Nasdaq: TERN) was another big winner, soaring 623% in nine months, following its appearance on Adam’s radar in May 2022.
And Meihua International Medical Technologies (Nasdaq: MHUA) soared 1,276% between July 2022 and January 2023 — a period of just seven months.
Those are just some of the companies that have showed up on Adam’s 10X Stocks system, which continually scans the entire market.
In this video presentation, Adam gives you the full details on how he finds the right stocks, in the right mega trend, at the right time … and manages to find them when they’re trading around $5.
With low-priced stocks at a historic point where they’re likely to trounce the market in the next few years, identifying the best low-priced opportunities today is crucial for growing your wealth in the future.
Again, this “$5 Rule” has created several 10,000% opportunities over the last several decades.
And things are really heating up now.
Aaron James
CEO, Banyan Hill, Money & Markets