- Penny stocks have the potential to grow by leaps and bounds in the long-term horizon
- As they are cheaply priced, the stocks can be bought in bulk quantities or with little money in pocket
- During the unprecedented crisis, some of these stocks have yielded double-digit returns: POG, PFD, and FCH in focus
UK’s GDP has fallen by more than 20 per cent during the first quarter of 2020. This is due to the carnage caused by the coronavirus pandemic and the prevalent uncertainties with reference to Brexit. The businesses are struggling to remain afloat and seeking consolidation.
Recently, the sell-off triggered in the US tech stocks sent jitters to the London’s broader equity benchmark index, Footsie. Industry experts suggests that this is the time when investors can consider tweaking their portfolio, and at the same time they should avoid being driven by greed.
In the equity investment arena, penny stocks are classified as companies with a low market capitalisation, micro-cap stocks listed and traded on the recognized stock exchanges. We consider penny stocks to be any stock under 100 pence or GBX 100. The other crucial characteristics of penny stocks are that they are mostly illiquid and have large spread between the bid and ask quotes.
Liquidity is one of most important factors in equity investment and many investors ignore it quite often. Liquidity is defined as number of shares available for trading in the market on a daily basis. The higher the liquidity, the lower will be the spread between bid and ask quotes. On the other hand, lower the liquidity means higher spread between bid and ask quotes. Also, illiquid stocks can be manipulated easily by a bunch of traders through placement of a large order- what is also known as market making.
Penny stocks generally carry a higher risk against large-cap and mid-cap stocks because of a lack of liquidity, smaller number of shareholders, limited information availability, and larger spread between the bid and ask.
Nevertheless, many a times, it is experienced that penny stocks investments have multiplied the investors’ fortunes and have handed a gargantuan amount of return in a very small time-span, which lures many investors. This is the reason why investors keep hunting for penny stocks.
As mentioned earlier, penny stocks are highly speculative in nature but time and again they have turned the tables for many investors. For instance, if an investor owns 50,000 shares of penny stocks priced at GBX 10 or 10 pence, even a GBX 10 rise in share price could deliver a 100 per cent return in a single trading session, which is generally difficult while trading large-cap stocks, because to trade such large quantum of shares, a huge sum of money is required.
However, there are also many downside risks involved in penny stocks investing. Since market making can be relatively easy to play in case of penny stocks, one could move prices by placing a large volume orders and creating a sudden spike in the stock price, without leaving a clue to an average investor to know whether the sudden spike is genuine or subject to a market abuse.
Therefore, one should conduct a thorough analysis before adding penny stocks to his investment portfolio, and portfolio weightage should be pre-defined before creating any position because a complete portfolio exposure to the penny could be extremely risky and in case bets turned out wrong it could destroy the investor's total wealth, with negative potential to recover.
In the UK, there is one specific sub-market of the London Stock Exchange that is designed to provide capital access to the smaller companies known as Alternative Investment Market. The AIM allows small companies to raise capital by listing their shares on the London Stock Exchange with relatively higher regulatory flexibility against those listed and traded on the main market of London Stock Exchange (LSE). Due to the increased regulatory flexibility provided, these penny stocks are highly speculative in nature.
According to data available on the LSE website, at present, there are more than 800 companies listed on the AIM-segment of the London Stock Exchange, out of which more than 700 are UK-based, and rest are international companies listed being traded on the AIM segment of LSE.
At the London Stock Exchange, penny stocks are usually found on FTSE AIM All-Share index and the FTSE SmallCap index. Constituents of these two indices with very low market capitalization, low price, and lesser availability of shares for trading are often considered as micro-cap or penny stocks.
In this article, we would discuss some penny stocks which have delivered great price returns in the recent times. (All data figures are taken from Refinitiv, Thomson Reuters.)
(Source: Refinitiv, Thomson Reuters)
FTSE 250 listed Petropavlovsk Plc (LON: POG) is a Russian gold miner, which is engaged in the mining of precious and non-precious metals. During Covid-19 pandemic in the H1 FY20, the operations of the company have shown resilience and registered a remarkable level of gold production and sales, which generated substantial cash to reduce the net debt level.
According to the first half trading update of 2020, the gold miner recorded a 42 per cent increase in total gold production during the period to 320.6 kilo ounces (koz) (H1 FY19: 225.0 koz). In addition, there was a whopping 39 per cent increase in total gold sales recorded at 312.4 koz during the first half of 2020 (H1 FY19: 225.0 koz). The average realised gold prices were up by 27.53 per cent to US$1,640/oz in the first half of 2020 (H1 FY19: US$1,286/oz). Moreover, the construction of a new flotation facility at Pioneer remained on schedule, and the plant is expected to be fully operational by Q4 FY20.
While writing on 7 September, at GMT 01:00 PM+1, before the market close, POG shares were trading at GBX 35.35, up by 2.91 per cent from the previous day closing price. The stock has delivered a price return of 42.20 per cent during the last three months.
Premier Foods Plc
Food & Beverage company, Premier Foods Plc (LON: PFD) recorded a growth of 3.9 per cent to £705.6 million (FY20) in its branded items segment by leveraging upon its strong brand equity and innovative products backed by strong advertising along with its strategic retail partnerships.
The overall group sales were up by 22.5 per cent in the first quarter of 2021. UK witnessed a growth of 23 per cent during the first quarter of 2021. The Group has been investing in its online proposition and has delivered growth of 115 per cent in the first quarter of 2021.
The revenue from UK operations was up by 4.3 per cent in the fiscal year 2020. During the unprecedented crisis, food has been a key industry. The company witnessed a surge in demand for items such as cooking sauces and baking items during the outbreak of COVID-19. In the current scenario, the company expects stable demand across its product categories. On 7 September 2020, at the time of writing, GMT 12:25 PM+1, PFD shares were trading at GBX 82.70, up by 0.49 per cent against the previous day closing price. The stock has delivered a price return of 66.30 per cent during the last three months.
Funding Circle Holdings Plc
United Kingdom-based company, Funding Circle Holdings Plc (LON: FCH) provides a lending platform, which facilitates an online marketplace that allows entrepreneurs to access funding in form of business loans (both secured and unsecured loans) from investors and SME’s (small & medium sized enterprises). The company provides access to credit through convenience of an online tool. The company’s loans under management grew by 19 per cent year on year to £3.7 billion in 2019. Despite a challenging economic backdrop, the company’s revenue was up by 18 per cent to £167.4 million in 2019 (2018: £141.9 million).
The peer to peer lending segment has grown rapidly during the unprecedented crisis. Metro bank recent acquisition of RateSetter is a recent example of banks foraying into this segment. On 7 September 2020, at the time of writing, GMT 12:24 PM+1, FCH shares were trading at GBX 87.90, down by 2.23 per cent against the previous day closing price. The stock has delivered a price return of 12.9 per cent during the last three months.
6-Month period Comparative chart: POG, PFD, and FCH
(Source: Thomson Reuters)