Indiainfoline - Special Report

Penny wise, pound foolish

More than 600-penny stocks (traded value of less than Rs 10 a share) have outperformed their high-priced peers and they have made themselves appear to be ‘penny wise’ and their peers ‘pound foolish’. Presently there are around 1700 penny stocks listed on the BSE, and surprisingly 37% of them have given returns of more than 100%. But, one thing must be noted that these counters are ‘high risk’ stocks. Investors have burnt their fingers in the past on account of the low liquidity that these counters offer and were unable to sell their shares when they wanted to exit these counters.

Consider this: one of the penny stock has given 3900% return (closing price as on Nov 22 subtracted by 52 week low price) in just over two months. Also, the counter is traded almost everyday with healthy volumes of around 1.5-2 lakh shares a day of late. That’s not the only penny stock with such an amazing return on capital at the stock markets. An analysis on all the stocks listed on the BSE reveals that there are 621 stocks that have offered returns of more than 100%. Yearly data shows that around 40-penny stocks have offered returns in the range of 500-5186% returns. And 560-odd penny stocks have offered returns anywhere between 100-500%.

But hang on! There are a lot of risks that these stocks carry. There is no doubt that there are many counters with a healthy mix of volumes, trades and players generating liquidity in the scrips. But, these stocks fall short to the number of counters with low liquidity. The ratio of stocks with high liquidity to low liquidity is approximately 2:5. Moreover, a number of counters trade regularly (at least once a week), but again many scrips virtually have no trades for weeks together. The ratio here would be 3:5. Also, many of these stocks are in the B2 category, which means that these counters are low cap scrips and may have very little floating stock. Further, many analysts do not research most of these companies and data available on company activities is very limited. That puts these companies in ‘high-risk’ zones.

And not all penny stocks rise. A further analysis shows that 140-penny stocks have actually fallen and the fall is as high as 91% (52 week high price subtracted by closing price as on Nov 22). There are 38 stocks that have fallen more than 80% and 69 counters have fallen between 51-79%