THE DANGEROUS PURSUIT OF PENNY STOCKS
By Ruma Dubey
Sometimes, it is difficult to understand the psyche of the investor. In a bull market, when the markets are booming and almost all stocks have run much ahead of valuation, hunting for penny stocks comes naturally, or should we say, is any hunters instinct. But in a bear market, when blue chips are better priced and hold promise of bigger gains when times improve, why then this pursuit for penny stocks?
We have many investors/traders posting us queries on the website, asking for some penny stock ideas. The only question which comes to mind is “why?” This search for the elusive pot of gold at the end of the brilliant rainbow is what puts traders at risk. And this is a dangerous time to be on the hunt for penny stocks and it is actually the perfect time to stand back and look at where and what we are investing in. Wait for the dust to settle before you take a call on large cap stocks too!
The one omnipresent character of all traders buying and selling shares on the bourses is greed. Even if a trader, in a particular stock is in handsome profits, he continues to hold, hoping to make more. And then
there are the other traders, the high risk traders, who want to invest only in small cap or penny stocks and hope that one day it becomes a mid cap stock. But does that happen? Maybe we come across a few random cases; there are stories of more losses than gains, yet traders keep a selective memory and buy into penny stocks, only to get trapped.
Penny stocks are characterized by scams, with management and manipulative brokers having one point agenda – to snarl susceptible traders. These stocks typically have volatile price variations. The most telling pointer is when a stock has a pitiable volume of trade but yet manages to hit a new high with even every 100 shares traded. Market cap is usually very small. Risk is very high, with dubious credentials of the management. Buying into such stocks is easy but try selling it when the price rises and you will know the true meaning of being trapped in a penny stock. Lack of liquidity and high volatility should be the big blaring warning signs. Delisting is a frequent phenomenon. Brokers go overboard recommending these stocks and SMSes are often used to sell these stocks. Despite all these facts, people constantly ask for advice on which penny stocks to buy.
Take a look at some of the stocks which have hit a new high today. Asya Infosoft hit a life time high today at Rs.84.70 even while its market cap stands at Rs.20 crore and it ended FY15 with a net profit of Rs.11 lakh. Promoters stake is at a pathetic 9.92%.
Arfin Finance is another company which hit a new life time high today at Rs.67.30. Its market cap is a pitiable Rs.6 crore though promoters stake is high at 72.27%. Or take the case of Artech Power Products – again another life time high today at Rs.20.20, in fact frozen at the 5% upper circuit but its market cap is at an unbelievable Rs.30 lakh and shareholding pattern is weird – at end of Sept’14 it was at 26.17%, it was down to 0.33% in Dec’14 and now at end of March’15, it is at 74.46%. An unenviable loss making track record, when it comes to financial performance.
And have you heard of Dwitiya Trading? It too hit a life time high today at Rs.1127.50. Though its market cap stands at Rs.560 crore but promoters stake is dangerously low at 0.57%. And how did it end FY15? With a measly net profit of Rs.3 lakh!
Indra Industries? Same story – new life time high today at Rs.39.60 and market cap is Rs.16 crore and no financial performance has been reported after Dec’14 quarter.
The list of such stocks is endless - Shree Shalin Textiles, Sulabh Engineers, Gee El Woollens, Kothari World Finance, Nimbus Projects, Spectrum Foods,Tuni textiles, Kaleidoscope Films, Roselabs Industries, Well Pack Papers, Mahan Industries, Bodal Chemicals and Interlink Petroleum which remain active though performance is not even worth mentioning. Similar stocks, which one should be wary of : Alufluoride, Arms Paper, Asahi Infra, Avon Corp, Bala Techno, beckons Inds, BLB, Daikaffil Chem, GSB Finance, Kaashyap Tech, Kohinoor Broadcasting, Kohinoor Techno, Mardia Samyoung Capillary, Netvista Information Tech, Sam Industries , Tyche Industries , Unique Organics , Southern Ispat & Energy , Proto Developers & Tech, Uniroyal Industries, NGL Fine Chem and many more.
Take a look at our stocks mentioned in the column – Danger Stocks and it would make you wonder what makes people trade in such stocks at all!
The list in endless and the queue of traders wanting to pick the next ‘TCS in the making’ or the next ‘L&T in the making’ is growing. And that is worrisome. Mid cap stocks are still a better risk than small caps. And remember – rarely do penny stocks ever become even mid caps, forget becoming large caps.