Are Penny Stocks Really Worth the Risk?
This is a question that many people ask and it seems that there are many answers.
As you know, like any other asset class, investing in penny stocks comes with risks. Many of them.
Mind you, in this space, stocks have often fallen 80-90% in a short space of time.
Take the example of Ozone World, PALM Jewels and Evexia Lifecare. Look at the price charts of all these companies and you will see that they are down more than 80% from the level they traded a year ago.
And there are more on this list…
While penny stocks are notorious and known for their illiquid status, a select few have the ability to make huge profits in a short period of time.
It is not uncommon for a pennystock to rise as much as 5x, 10x or as much as 100x in a short period of time.
We conducted a search for stocks trading between Rs 100 between 23rd March 2021 and 23rd March 2022 to see what kind of profit penny stocks offered to investors.
Out of a total of 1,734 stocks, 275 delivered negative returns, while 14 remain unchanged and trade at exactly the same level as a year ago.
Surprisingly, 1,445 of them are trading in positive territory with many making huge profits.
How huge? How about no less than 10,150%?
That’s right. Shares of Kaiser Corporation have surged 100x in the past year, rising from just Rs 0.38 to Rs 38.95.
The party doesn’t seem to be ending anytime soon as stocks continue to hit the upper circuits.
Data from BSE shows that there are only buyers waiting on the sidelines to buy the script, with no sellers willing to sell their shares (at least for now).
Kaiser Corporation is engaged in the printing of labels, stationery, magazines and boxes.
So what justifies a 10,000% rally in the stock? Is it because of his financial position? Or low liquidity?
Financially, the company doesn’t have enough to support this rally. Net sales for fiscal year 2021 were in line with reported sales for prior years. While the company did turn profitable in 2021, its earnings figures were not extraordinary.
Could it rise as the company’s quarterly performance improves? We do not know. Could be.
Over the past four quarters, the company has reported an improvement in sales and net profit compared to last year’s figures.
When it comes to liquidity, a first look at the company’s stock pattern may tell you a different story. The company’s promoters hold a 59.5% stake, which means there is plenty of liquidity left for private shareholders.
But that’s not really the case. The pattern of the company’s private equity shares shows that only 6.5% of its total equity, or 3.4 million shares, is owned by individuals. The remainder, 33.8%, is owned by legal entities named Lorance Investments and Xicon Power.
Polo Queen Industrial & Fintech is following in the footsteps of Kaiser Corporation, with a profit of 6,500%.
The company has seen its share price skyrocket from Rs 1 to Rs 66 in the past year. Profits have fallen recently due to broad selling, otherwise it has peaked at Rs 89 in January this year.
The company is engaged in the trade of substances, FMCG products and minerals and chemicals. It markets FMCG products under its own brand ‘Polo Queen’s’ in the personal care, home care, kitchen care and textile care segments.
Polo Queen promoters own approximately 75% of total equity. The company underwent a stock split from Rs 10 to Rs 2 in December last year, opening up more liquidity in the market.
This didn’t bode well as it resulted in a sharp drop in the stock price, as shown in the chart below.
Coming back to the toppers…
Vegetable Products and Cressanda Solutions are next in line with more than 2,900% profit.
Vegetable Products, which is engaged in the production of vegetable edible oil products, has rallyed despite being a loss-making company.
It sells products under the brand name – Pratap Vanaspati.
What has caused such a sharp rally at this little-known producer of edible oil? The government may have cut tariffs following a rise in global commodity prices.
Other than these, here are the best-performing penny stocks of the past year.
Since they are priced low, retail investors have a penchant for them as they can buy large chunks of these stocks at low prices.
Retailers also like the prospect of earning high returns in the short term.
But it should be borne in mind that most of these stocks will not have a track record of solid fundamentals, they will be saddled with debt and have a low promoter position.
In short, not a good track record.
Experts have often warned investors that it would be a mistake to expect high returns from all penny stocks.
On the plus side, penny stocks can also be great investments as they diversify your portfolio. But it is important that you separate the wheat from the chaff.
In a volatile market (like the present), be very selective and watch out for penny stocks that pay regular dividends. In this way, your disadvantage will be covered.
Always watch out for the company’s debt level. A debt to equity of less than 1 is preferable.
Finally, look at the balance sheet, look at the debt to equity ratio and see if the company has a track record of consistent dividend payments for the last 5 years.
With a clear strategy by your side, your journey can turn out relatively more comfortable.
Since you’re interested in penny stocks, check out co-head of research at Equitymaster, Rahul Shah’s video where he hooks up on the right penny stocks to watch for in 2022.
Knowing which penny stocks to watch out for give you the upper hand.
Video Link – Penny Stocks to Your Watchlist in 2022.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
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(This article is syndicated from Equitymaster.com)
(This story was not edited by DailyExpertNews staff and was generated automatically from a syndicated feed.)