Five Tips for Buying Cheap Stocks

Tip #5 – Access the company’s survival potential.

Unfortunately, there is no magic formula to determine
which incubator businesses will succeed and which will fail. However, there are certain warning signs that will give you a good indication of a company’s
challenges, as well as its survival potential.

#1 – Betting it all on one product. The majority of companies — at inception — do have just one product or service. But, over
time, most will expand their offerings, either by design or by accident. That not only brings additional revenue sources into their coffers but helps
to diversify their business should one or more product lines experience a setback.

#2 – Companies dependent on outside funding. While most biotechs and pharma companies go into the business hoping to create the next blockbuster
drug, very few actually succeed, especially in an uncertain economy. Their R&D efforts require tremendous cash, and during tough economic times,
the deep pockets of venture capital funding dry up. Don’t get me wrong, we absolutely need biotech companies. But if you just have to have biotech in your holdings, make sure it is a very small portion of your
portfolio

#3 – Companies that require continued capital investment. Over the long term, shareholders make spectacular returns by buying businesses
that are able to achieve extraordinary returns on capital. This leads to excess capital that the company can use to repurchase shares, pay a dividend
to shareholders or reinvest in further growth. Companies that constantly need to make additional capital investment to keep the business going are
the antithesis of this ideal — the main beneficiaries will be employees, management, suppliers and government— not shareholders.

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