The Penny Stocks opportunity is not over. Here’s how to play it

And there are a few stocks that have generated multibagger returns of 100% to 872%.

Hindusthan National Glass, down 67% in 2022 so far.

Ballarpur Industries, down massive 65% in 2022 so far.

Birla Precision, down 53% in 2022 so far.

Sintex Industries, down 52% in 2022 so far.

Indowind Energy, down 49% in 2022 so far.

The list continues…

Of the 1,950 penny stocks (shares trading under Rs 100) actively traded as of January 1, 2022, 1,163 of them have generated negative returns so far in 2022.

A few hundred of them are trading more or less close to the same levels they were trading at the start of this year.

And there are a few, 62 to be precise, that have generated multibagger returns from 100% to 872%.

These results came up when we ran a query on penny stock performance this year. By the way, you can check out the best performing penny stocks of 2022 here.

Well, as the losses show, investing in penny stocks is not a bed of roses. The euphoria around penny stocks among beginners, retail investors in India is getting crazier day by day.

How many times do you see a stock go up over 800% in just 2 months! Or an action that wipes out your wealth entirely in the same period?

If you invested in penny stocks in 2022, you now know it’s a tough mix. You’ve probably seen how volatile the stock market is.

If blue chip stocks like HDFC and HDFC Bank are also down, you know that is a warning sign and an indication that we are on the verge of volatility.

So during volatile times like the one we are currently experiencing, it is important to be very selective when it comes to penny stocks. You need to have penny stocks that regularly pay dividends for the decline to be capped.

Penny stocks with strong payouts and strong balance sheets generally survive a crash better than other stocks.

We don’t just say this based on random assumptions. The figures confirm the data.

After the bull market between 2014 and 2017, the following two years were brutal for mid and small caps, the segments where most penny stocks originated.

First, the small cap index fell 23% in 2018. Then it fell another 34% over the next 15 months. This resulted in a huge 50% collapse from top to bottom. Ouch!

The strong bull market gains from 2014 to 2017 were completely wiped out in this crash. It was the worst stock market carnage.

During the 2018 period, penny stocks that recorded the highest median payouts in the past five years performed similarly to the BSE Small Cap Index. A few of them fell more, but the numbers were higher for stocks that performed in line with the small cap index.

Some of them also ended in positive. Indian Energy Exchange (IEX), Goldiam International, Firstsource Solutions, Generic Engineering, Birla Cable, etc. which have been profitable and have paid regular dividends.

Over the next 15 months as well, when the small cap index fell 34% between January 2019 and March 2020, stocks that paid dividends and had rock-solid balance sheets did well.

2dk4h8qo

Of course, there were a few that fell more. Like PC Jeweler, Jaiprakash Associates, Jain Irrigation and others, which were already under scrutiny. And the late March 2020 crash hammered even quality stocks.

The point we’re trying to make here is that it’s important to stick with penny stocks that pay dividends regularly, during periods of volatility. They generally survive a crash better than other stocks.

Here’s a list of penny stocks that have paid regular dividends, reported profits for the past three years, and have a leverage ratio of less than 1.

pmrdarog

The stocks mentioned in the tables above are not recommendations.

What about attribution?

And after selecting the best penny stocks to buy in 2022?

You can get the most out of penny stocks by allocating your capital efficiently. In other words, shift the split between penny stocks and term deposits.

As we are dealing with penny stocks, it is always important to keep some cash on the table.

So instead of parking your total capital in penny stocks all at once, allocate small, equal shares periodically over an extended period of time.

Don’t make the mistake of stocking up on penny stocks at any stage of the market price cycle.

For example, say you have Rs 100. Start by allocating Rs 25 each to penny stocks and fixed deposits in the corpus of Rs 100. Keep at least 25% in both assets and never go 100% in one or the other.

Then allocate the remaining Rs 50 based on how close you are to the top or bottom of the market cycle. If you think the markets are expensive, allocate the remaining 50 rupees entirely to fixed deposits or allocate 25 rupees each to both asset classes.

The beauty of this approach is that you are always in “collision protection” mode because you are never 100% invested in penny stocks.

Interesting, isn’t it?

Investors with money on hold can use the market correction as an opportunity to allocate more.

To conclude…

Don’t panic in the midst of volatility and stick to a process.

In penny stock investing, it is very important to distinguish between penny stocks that are worth investing in and those that are highly speculative.

Prepare for a bumpy ride in 2022 as inflation bells still ring and geopolitical tensions between Russia and Ukraine seem far from over.

With a clear strategy by your side, your trip can be relatively more comfortable.

Happy Penny Stock Investing!

Warning: This article is for information only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

Comments are closed.