In for a Penny, in for a Pound

Nickey Mirchandani, IIFL | Mumbai | July 23, 2015 10:43 IST

Invariably available at rock-bottom prices, penny stocks are rarely equated with rock-solid prospects. That some of them prove multi-baggers do not make every penny stock attractive, nor do the bad sheep erode the promise of the fundamentally good picks among them. Here’s an attempt to explode the myths and misconceptions surrounding this phenomenal stock market vehicle that make it more elusive than it really is.

Money ProfitThe lure of the popular adage ‘Rags to Riches’ brings scores of retail investors to the world of equities but only a few of them see the magic unfold in the upward march of their investments. On the contrary, there have been umpteen instances of the diametrically opposite, of moneyed folks going broke. More often, the architect of their downfall is their blind faith in the hypnotic promise of penny stocks, either induced by their gut feel or inspired by tips offered by overenthusiastic or even prejudiced market men.  This adage, which has been an inspiration for many to enter into the world of equities, can contrary to most beliefs fit the bill perfectly well for penny stocks- which mostly are perceived as “dead and highly risky investments”.
 


While, many might classify them as highly-risk investments, those who have taken calculated risks do reap a fortune. The theory of ‘high risk, high return’ holds true for those who have the eyes and ears to discover dark horses with the potential of exponential returns.  
 
Penny stocks could also been seen as an opportunity of hitting a jackpot with stocks, which are wrapped in a tiny price but hold the promise of gigantic returns. At the same time, the odds of going from boom to doom are higher if the decision is devoid of logic and worse in some cases, one may fall prey to manipulators and scammers who are active players in the penny stock segment.
 
Penny stocks, if chosen wisely, can be a great wealth-generating vehicle. Let’s have a look at a few penny stocks which have rained an equity bonanza for investors:-
Company BSE closing price as on 10/7/2015 BSE closing price as on 10/7/2014 Simple Return (%) Traded Volume as on 10/7/2015 ( In 000's) Market Capitalization as on 10/7/2015 (Rs. In crore)
Kesar Petroproducts Ltd. 177.00 9.18 1828.10 7.93 128.63
Uniply Industries Ltd. 106.60 6.14 1636.16 108.15 184.56
Dee Kartavya Finance Ltd. 107.00 7.14 1398.60 28.03 258.24
Kellton Tech Solutions Ltd. 76.95 8.94 760.74 161.85 334.67
Dynacons Technologies Ltd. 4.59 0.66 595.45 146.73 36.00
Cambridge Technology Enterprises Ltd. 39.90 6.08 556.25 5.08 78.33
Aplaya Creations Ltd. 43.35 6.88 530.55 65.00 623.37
Mangalam Drugs & Organics Ltd. 59.65 9.80 508.67 37.77 78.61
Fineotex Chemical Ltd. 39.00 6.47 502.78 92.27 437.96
Vidhi Dyestuffs Manufacturing Ltd. 29.95 5.70 425.44 153.01 149.59
 
Notably, all these ten were penny stocks a year before, eventually turning into multi baggers. Kesar Petroproducts, which commanded a meager price of Rs. 9.18 as of July 10, 2014 is now priced at Rs. 177 growing around 20 folds or by 1828.10% jump in just one year. Similarly, Uniply Industries which traded at Rs. 6.14 a year back from the latest date has zoomed by 1636.16% to trade at Rs 106.60 as of date.
 
Now, let’s compare the one-year return of these stocks with those from the benchmark Sensex 30 share index.
Company BSE closing price
as on 10/7/2015
BSE closing price
as on 10/7/2014
Simple Return
 
(%)
Traded Volume
as on 10/7/2015
( In 000's)
Market Capitalization
as on 10/7/2015
(Rs. In crore)
Axis Bank Ltd. 578.20 371.97 55.44 374.25 55.44
Bajaj Auto Ltd. 2470.90 2151.55 14.84 24.90 14.84
Bharat Heavy
Electricals Ltd.
268.85 243.10 10.59 640.75 10.59
Bharti Airtel Ltd. 419.45 334.65 25.34 184.27 25.34
Cipla Ltd. 648.50 435.00 49.08 69.09 49.08
Coal India Ltd. 419.65 371.15 13.07 316.70 13.07
Dr. Reddys
Laboratories Ltd.
3742.15 2651.90 41.11 13.53 41.11
GAIL (India) Ltd. 360.55 465.65 -22.57 81.17 -22.57
HDFC Bank Ltd. 1092.45 824.95 32.43 70.80 32.43
Hero MotoCorp
Ltd.
2572.50 2435.55 5.62 24.34 5.62
 
No doubt, the Sensex scrips are absolutely safe, fundamentally sound stocks and undoubtedly great bets, but have a look at their rate of return compared to the multi-baggers of the penny tribe. No doubt, hunting for the right penny stocks is a herculean task, but that’s the catch of the game.  Before you play in this high risk-high return game, study these Do’s and Don’ts of penny stock investment:
 
Research, not Search, holds the key: It’s always advisable to invest in penny stocks after thorough research which reveals key insights into the current position and prospects of these companies. The homework of digging into corporate and industry reports and mulling over expert advice will keep one away from scam artists who often create shell companies that exist only to engineer artificial booms and dooms.
 
Look for high volume: One should always look for those companies that are frequently traded to avoid a situation where you are stuck with the investment even when you wish to dispose it off or book a profit. Make sure your penny stocks are trading at a reasonable level, say, 100,000 shares a day or more, which signifies that they are in action on the bourses.  
 
Use Risk Capital: Investment in penny stocks is inherently risky and the only way to mitigate risk from portfolio wide perspective is to only invest money that you can absolutely afford to lose.  Sounds weird, but true, given if penny stock investments don't go well, one’s overall portfolio isn't being jeopardized.
 
Keep logic ahead of love: When dealing with penny stocks, be in the ‘sell’ mode. If you make 20 -30% on your penny stock, cash on it immediately unless you are sure of its long-term prospects. Notwithstanding the temptation to stick around, penny stocks are often an unlikely guide to stable returns.
 
Don’t short penny stocks - It’s best advisable not to short penny stocks, also referred as microcap stocks, since they usually lead to losses unless you’re well aware of technical analysis and insider/market information.
 
Don’t trade OTC stocks- Over -the-Counter (OTC) stocks are not well regulated as regular listed penny stocks, so one should avoid getting into such stocks.
 
Though the temptation to invest in penny stocks and earn 10 x returns can’t be overlooked, penny stocks are not an easy feast as abnormal and exponential returns often come with abnormal risks. Investors with higher risk appetites should ideally venture into such stocks without compromising on due and diligent research.
 
No wonder, legendary investor Warren Buffet made a vast fortune from pink sheet penny stocks in his formative years. But he never threw caution to the winds, precisely why he is where he is today.

*(With inputs from Shruti Khetan)
 

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