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Best Penny Stocks in India 2017-2018 in NSE-BSE Buying/Investing in penny stocks Good or Bad

ou have found some stocks trading at just Rs.5 or 10. What an opportunity? There must be blind people to leave these stocks unnoticed. I will profit from them. It can easily double or triple.

If this is your thought then that is exactly ‘Penny Stocks Investing‘. But is this rational? Let us find out….

I have a friend who bought a lot of Birla Power Solutions and Jupiter Biosciences in 2009. These were really hot penny stocks in late 2008. Let me tell you that he regrets his decision now. They have gone way down.

Are you gung ho about buying top penny stocks? You’ve made up your mind already? While I would certainly advice to invest in top quality stocks, here are a list of top low cost shares to invest in 2017-2018. How did we select them? The criteria we used for choosing best penny stocks was…

We made sure they’re not companies that vanish overnight. They must have been around a few years
They may not strictly be penny shares but border around them. Ie., each shares costs less than Rs.25 and market Cap less than 500crores
Their products/services must be real and visible
Must have some downside protection in short-term
Promoter holding must be 40% minimum
By this way we can at least make sure to screen the majority of bad companies (which most penny stocks usually are). Here is the list of top penny shares in India that meet above criteria

SL.No Penny Stock Name Price Market Cap(in Crores) P/E Ratio P/BV Div Yield(%)
1 IL&FS Invest. Mgrs 22.4 720.1 13.1 6.95 5.65
2 JVL Agro Industries 16.9 287.1 4.3 0.61 1.17
3 NeoCorp International Ltd. 15.4 59.3 3.01 0.23 3.21
4 Genus Power Infrastructure 25.3 678.2 11.21 1.22 0.38
5 Vijay Shanthi Builders 13.8 36.4 7.85 0.3 5.76
6 Manali Petrochemicals 10.7 184.3 5.92 0.87 4.66
7 Nitesh Estates 13.9 203.3 21.4 0.47 0
8 Manappuram Finance 67 6400 10.2 2.13 2.7
9 Lycos Internet 18.5 881.2 2.21 0.48 0.0
1) IL& FS Investment Managers – This is a very good company managed by IL&FS group. They are involved in Private Equity business and are the only listed PE firm in India. IL&FS has a strong brand equity. The last value of stock was around Rs.21 . It gives a very good dividend and has no debts. While you cannot expect it to triple or quadruple in next year, it is somewhat a decent stock to buy in at low cost per share.

Update: This penny stock paid Rs 1.3 as dividend ie., 7% of cost price. It is also down by Rs.2. The decent fundamentals are still intact.

2) JVL Agro Industries – It has a Market Cap of around Rs.200 crores and trading at around Rs.15 per share. It has P/E of 4 and book value of Rs.15. JVLis the largest single in-house manufacturer of Vanaspathi Oils. It has a dividend yield of around 1.5%

Update – This penny stock has moved from Rs 16.9 to Rs 20.5. Not great performance but not bad either.

3) NeoCorp International Ltd – Neo Corp is a packaging provider expecially in textile manufacturing. It manufactures under PackTech brand. It has a market cap of around Rs.60 crores and per share costs around Rs.15. The PE ratio is close to 2 and dividend yield is 4%.

Update:The market cap of this penny stock has doubled in last one year after featuring first on our list. It now trades at Rs31.

4) Genus Power Infrastructure – This is one of the leading electricity meters manufacturer in India. Have moderate debt on their books. The stock costs around Rs.21 and the market cap is around Rs.500crore. The PE ratio is around 9 and promoter holds around 50%. Earns around Rs70 crore profit every year. Decent fundamentals.

Update: This penny stock has gone up to Rs 46 now from Rs 21 when we first listed it. More than doubled.
What are Penny Stocks?
Penny stocks are shares of companies that have market capitalization (market capitalization-the total value or worth of the company) less than Rs.100 crore and each share trading below Rs.10. Do you know how many penny stocks trade on BSE or NSE. It’s 25% for the BSE and 10% for the NSE.

They look like a good grab as the downside seems limited. Penny stocks usually belong to companies with low quality management or negative future outlook. These penny stocks suddenly spring to life with huge volumes when there is an announcement or turnaround in the market.
Why are penny stocks cheap?
Most Penny stocks are cheap for a reason. It is mainly because

They have a low quality management
Non-transparent corporate governance
bad future business potential
Bad balance sheet and bad profit/loss account
Penny stocks usually seem to belong to dubious promoters. These promoters sell their unworthy financial companies during the peak period. Once they have off loaded their junk, they slowly disappear from the light. The investors then get stuck with the bad investments.

How do penny stocks operate?
Penny stocks usually have a promoter-operator nexus. The promoters usually hire investment bankers (low reputed mostly). These people in turn negotiate a deal with the operators who buy and sell shares anonymously with fake accounts. During boom times, people are ready to buy anything.

These operators carefully create a media frenzy or approach individual investors by mail/phone. They artificially push up prices and then offload these equity shares to investors. The profit is then shared between the promoter and operator.

Investors would have no idea as to what or how much shares were insider traded nor how long stocks were held. How many of you read the News and Announcements from BSE/NSE before buying penny stocks?
Risks in Penny Stocks

You buy a stock thinking it will go up in future. If it has a stealthy management, you do not know its real profits. Will you lend to a friend who lies all the time? It is something similar to that
There is a chance to lose 100% – The promoters can never return and your stock value goes from Rs4 to Rs 0. Yes it is a 100% loss.
Your stock may be de-listed – BSE/NSE once a while, delists penny stocks to clear the bourse. Once it is de-listed you do not have chance to sell it.
The trade volume value is too thin – You do not get a chance to exit as the value of shares traded is not uniform. It is big on some days and then zero on others. You cannot exit when you want.
Penny stocks are not traded widely. Some may be only delivery-based and not intra-day trading.
Penny stocks in India are not regulated. Most of them run risk of being delisted by bourses as seen in recent months due to low quality. Liquidity will be an issue for such penny stocks as you can’t sell them. So be careful on which stock you buy.
Pros of penny stocks:

If identified properly, the rate of return is huge. As high as 200-500%
Some quality companies , due to temporary hiccups and bad environment end up as penny stocks. Once market and economy turns they bounce back giving super-normal returns.
They are cheap. So you can buy large quantities.
How to trade penny stocks
If you have decided to get involved in penny stocks, make sure you follow these tips. This will help you avoid the major blunders that penny stock investors make.

Don’t trade OTC stocks. OTC or Over -the-Counter stocks are not well regulated as regular listed penny stocks
Do own analysis and discard email/sms which promise you the next million in trade. They make you gullible targets
Look for momentum in the stock. Learn some basic technical analysis.
Try not to short penny stocks. They usually lead to losses unless you’re well aware of technical analysis and insider/market information
Always have your stop losses in place. Don’t invest more than 5%of your total stock portfolio in a penny stock
Choose high volume stocks. The total quantity of stocks traded each day must atleast be 10-15 times what you plan to buy. There is no use buying a penny stock which you can’t sell.
Don’t buy penny stocks just because they’re cheap. Look for decent fundamentals atleast. May not be even greta or good but the penny stock should not be fraud or bad which is case most of time.
Check if the business of the penny stock company is turning around or will turn around. Avoid loss making companies that reported loss for 2 0r more years. Should have visible signs of recovery. Else there is no trigger for the penny stock. Do you know Marksans Pharma, Uniply industries were penny stocks in India once trading at 5rs each. now they trade Rs 100 and Rs 700 respectively.
Don’t try to average the price of a penny stocks on its way down.
Don’t have 50 penny stocks. If you invest in penny stocks then better to have less than 5 or 10 so that tracking is easy.
Following the above measures will protect the downside of your investment. If there is a mistake,then you can book a loss without losing 100% capital if you’re alert.

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Peter Lynch: Making Money by Investing in “Fast Growers”

“The investor of today does not profit from yesterday’s growth.” Warren Buffett

Most of us have relatives who like to fashion themselves as ‘stock-gurus’, with their stories revolving around how they ‘could have been’ millionaires now, if only they had held their nerves. The stock that comes up frequently in these conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of Infosys in the IPO (that went undersubscribed in 1993), 51,200 shares (adjusted for bonus issues) worth sum of Rs. 5,46,30,000 would be in your kitty.

Infy has given CAGR returns of whopping 48.2% to investors during last 22 years. Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at 5 crores and 46 lakhs today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?

A Fast Grower is a small yet aggressive & nimble firm, which grows roughly at 20-25% a year. This is an investment category which can give investors a return of 10 to as much as 200 times the investment made by them. No doubt, it remains a favourite of Peter Lynch!

In 1950s, the Utility & Power Sector were the fast growers with twice the growth rates to that of the US GDP. As people got more power-hungry gadgets for themselves, the power bills ran through the roof & the power sector surged with booming demand. Post the Oil Shock in 70’s, cost of power generation became high with power tariffs going up; people learnt to conserve electricity. Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar decline was observed in the Steel Sector & Railroads. First, it was the Automobile Sector, and then the Steel, followed by Chemicals & Power Utility & now the IT Sector is showing signs of slowing down. Every time, people thought, rally in the fast growers of the age would never end, but it did end, with people losing money as well as their jobs. Those who thought differently like Walter Chrysler (founder of Chrysler Corporation), who took a pay cut and left the railroads to build new cars in the turn of the last century, became the next millionaires.

Three phases involved in their life cycles, are:

1. The Start-Up Phase: Majority of the companies either burn up all the cash or run out of ideas by the end of this phase. Maximum casualties have been observed here, making it one of the riskiest phases. However, maximum returns can be made from them, if one enters near the end of this phase.

2. Rapid Expansion Phase: The Company’s core proposition has worked now, with the strategy being replicated by expansion of product/service portfolio or consumer touch points.

3. Mature Phase: Growth slows down, either due to high debt or low cash, owing to the massive expansion witnessed in early stage. Fall in demand or legal restrictions might also contribute to faltering growth.

The trick is to track, which phase the organization is in, at the moment. If the firm is in late start-up phase with possibility of moving to rapid expansion phase, buy the stock when it is still cheap. Once firm’s earnings start falling with its products witnessing poor demand, it’s time to bid goodbye to the stock.

The key parameters involved in Peter Lynch’s ‘two minute drill’ are:

1. P/E Ratio: avoid stocks with excessively high P/E

2. Debt/Equity Ratio: should be low

3. Net Cash per Share: should be high

4. Dividend & Payout Ratio: should be adequate

5. Inventory levels: lower the better

Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.

Checks specific to Fast Growers:

1. The star product forms a majority of the company’s business.

2. Company’s success in more than one places to prove that expansion will work.

3. Still opportunity for penetration.

4. Stock is selling at its P/E ratio or near the growth rate.

5. Expansion is speeding up Or stable

One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.

A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.

1.The quarterly sales decline for existing stores.

2. New stores opening, though results are disappointing: weakening demand, over supply.

3. High level of attrition at the top level.

4. Company pitching heavily to institutional investors talking about what Peter Lynch calls ‘diversification’.

5. Stock trading at a P/E of 30 or more, when most optimistic estimates of earning growth are lower than 15-20%, thus, unable to justify the high price.

Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!

If you feel its difficult for you to identify Fast Growers stocks at early stage, you can subscribe to our Hidden Gems and Value Picks subscription services. We put best of our efforts to identify companies having potential to give exponential returns in medium to long term. Its our mission to ensure that you reap the best returns on your investment, our objective is not only to grow your investments at a healthy rate but also to protect your capital during market downturns.

 
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Posted by on January 9, 2016 in stock market

 

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