As retail investors, we often look for penny stocks with strong fundamentals to include in our portfolios. Penny stocks are highly volatile, which means they can offer substantial returns over time. Despite their inherent risks—risks that could potentially wipe out our investments—many of us are still tempted to invest in them. Why?
One reason is the allure of returns they have generated for investors in the past. Take Titan Company Ltd, for example. It once traded at just ₹3.31 and now has a current market price of ₹3,445—a growth of about 103,978.55%. If you had invested ₹10,000 in Titan shares in 1993, your investment would have grown to ₹42.06 lakh by the end of 2024, representing a remarkable return of 41,960.4% over 31 years.
Similar success stories exist with companies like Infosys, Bajaj Finance, Eicher Motors, and Escorts Ltd. These companies started as penny stocks but have since become leaders in their fields due to consistent performance, strong management, quality products and services, brand loyalty, and continual innovation.
So, are penny stocks a worthwhile investment? Let’s explore the fundamentals to find out.
What are Penny Stocks?
In India, penny stocks are typically defined as stocks trading at very low prices with low market capitalisation. These stocks are usually listed on smaller exchanges such as the BSE (Bombay Stock Exchange) or the BSE SME (Small and Medium Enterprises) platform.
Penny stocks are known for their high volatility. Prices can experience significant swings in short periods. This offers both high reward potential and high risk. The volatility is often due to the lower market capitalisation and trading volumes of these stocks. Market sentiment and speculative trading often influence penny stocks. News, rumours, and investor sentiment can drive rapid price movements, both upwards and downwards.
As investors, we need to watch out for “pump and dump” schemes. Promoters artificially inflate the stock price with misleading positive statements and then sell off their shares at the peak. Information on penny stocks is often less readily available compared to larger companies. These stocks may not receive coverage from major brokerage firms or financial analysts.
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Are Penny stocks good Investments?
As mentioned earlier, we often look for opportunities or events that can boost our portfolio’s value. The most successful investors aren’t renowned because every stock they chose skyrocketed; rather, they excel because a few wise investments generated significant returns over time, balancing out losses from other investments.
But the question remains: Are penny stocks good investments? Their high-risk nature can be intimidating. While some have generated substantial wealth, others have led to bankruptcy. This is where intelligent investors come into play. A careful study and analysis of penny stocks with strong fundamentals and an understanding of growth potential in sectors supported by government policies, diversification, and a long-term perspective can help us identify valuable investment opportunities.
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Penny Stocks with Strong Fundamentals
Let’s discover penny stocks with strong fundamentals. Morepen Laboratories Ltd, Vertoz Ltd, PTC India Financial Services Ltd, HMA Agro Industries Ltd, Geojit Financial Services Ltd, Jaiprakash Power Ventures Ltd, Balmer Lawrie Investment Ltd, MIC Electronics Ltd, BCL Industries Ltd, Spectrum Foods Ltd, and Taparia Tools Ltd.
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Penny Stocks with Strong Fundamentals
| Stocks | Current Price (In ₹) | Market Cap (In Crores) | ROE | P/E Ratio | Debt to equity | 3-year Returns | 1-year Return |
| Morepen Laboratories Ltd | ₹ 61.9 | ₹ 3,393 Cr. | 11.34% | 28.8 | 0.03 | 5% | 65% |
| Vertoz Ltd | ₹ 31.8 | ₹ 2,707 Cr. | 9.96% | 144 | 0.09 | 79% | 157% |
| PTC India Financial Services Ltd | ₹ 55.9 | ₹ 3,592 Cr. | 6.33% | 21.3 | 1.54 | 45% | 103% |
| HMA Agro Industries Ltd | ₹ 50.2 | ₹ 2,562 Cr. | 14.03% | 47.1 | 0.69 | - | -20% |
| Geojit Financial Services Ltd | ₹ 104 | ₹ 2,484 Cr. | 18.6% | 14.8 | 0.48 | 10% | 111% |
| Jaiprakash Power Ventures Ltd | ₹ 18.2 | ₹ 12,508 Cr. | 13.33% | 10.41 | 0.55 | 69% | 149% |
| Balmer Lawrie Investment Ltd | ₹ 88.6 | ₹ 1,966 Cr. | 14.4% | 11.4 | 0.09 | 25% | 103% |
| MIC Electronics Ltd | ₹ 79.9 | ₹ 1,927 Cr. | 60.3% | 34.4 | 0.10 | 295% | 177% |
| BCL Industries Ltd | ₹ 62.8 | ₹ 1,853 Cr. | 16.7% | 19.6 | 0.73 | 40% | 32% |
| Spectrum Foods Ltd | ₹ 21.1 | ₹ 48.6 Cr. | 100.57% | 26.3 | 1.33 | 38% | 12% |
| Taparia Tools Ltd | ₹ 6.57 | ₹ 9.97 Cr. | 31.51% | 0.09 | 0.00 | -30% | 147% |
Facts About penny stocks with strong fundamentals
Now it’s time to discuss a few facts about some of the penny stocks with strong fundamentals. We’ll use five key parameters to analyze these stocks:
1. Business of the Company- Understanding the core operations and market presence of the company.
2. Revenue and Profit Growth over the last 3 years. (Consistent and positive growth)
3. Return on Equity and Return on Capital Employed (ROE>15% and ROCE>15%)
4. Stock’s price-to-earnings ratio vs. industry PE to gauge valuation.
5. Debt-to-Equity (Less than 1) indicating manageable debt levels.
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Vertoz Ltd
Business: Vertoz leverages AI to deliver cutting-edge solutions in MadTech and CloudTech. It provides services in digital advertising and monetization (MadTech) alongside digital identity and cloud infrastructure (CloudTech). Vertoz supports a wide range of clients, including businesses, digital marketers, advertising agencies, digital publishers, cloud providers, and technology firms.
Revenue and Net Profit: Vertoz has shown consistent revenue and net profit growth over the last three years. The revenue growth CAGR is 40%, while the profit growth CAGR is 24%.
ROE and ROCE:
-ROE: 9.96% (less than 15%)
-ROCE: 13.4% (less than 15%)
Price to Earnings Ratio: The PE ratio is 144, higher than the sector PE ratio of 33.97.
Debt to Equity Ratio: The debt-to-equity ratio is 0.09, which is healthy and below 1.
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HMA Agro Industries
Business: HMA Agro Industries operates in the Food Processing sector, offering a range of food products. Established in 2008, the company has grown to a market cap of ₹2,562.4 crore as of August 2024.
Revenue and Net Profit: The company has demonstrated significant revenue growth in recent years. For FY 2023-2024, revenue reached ₹4,813.3 crore, marking a 50% increase from the previous year. However, net profit decreased by 19% to ₹100.6 crore. The 3-year revenue growth CAGR is 41%, but profit growth has been volatile, showing a 12% CAGR over the same period.
ROE and ROCE:
-ROE: 14.03%
-ROCE: 19.04%
The metrics are around the ideal benchmark of 15%, thus suggesting a reasonably efficient use of equity and capital.
Price to Earnings Ratio (P/E): The P/E ratio stands at 47.1, which is relatively high compared to the industry standard but lower than some leading companies in the sector.
Debt to Equity Ratio: The Debt-to-Equity Ratio is 0.69, indicating a balanced approach to leveraging and a safe position for investors.
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Jaiprakash Power Ventures Ltd
Business: Jaiprakash Power Ventures Limited is involved in coal mining, sand mining, cement grinding, and the generation of thermal and hydroelectric power.
Revenue and Net Profit: The company has shown consistent revenue and net profit growth over the last three years. The 3-year revenue growth CAGR is 27%, while the profit growth CAGR is 98%. TTM Profit growth stands at 21842%.
ROE and ROCE:
-ROE: 13.33% (less than 15%)
-ROCE: 13.91% (less than 15%)
Price to Earnings Ratio (P/E): The Price-to-Earnings (P/E) Ratio stands at 10.41, significantly below the sector average of 26.16.
Debt-to-Equity Ratio: With a Debt-to-Equity Ratio of 0.55, the company maintains a healthy financial structure, primarily financing its assets through equity rather than debt.
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MIC Electronics Ltd
Business: Since 1988, MIC Electronics has led the design and manufacturing of LED video displays, high-end electronic equipment, and telecom software. It was once ranked 5th globally in true colour display technology. SHARP (Japan) selected MIC to supply solar-powered lanterns for its CSR projects. MIC also became the first to receive RDSO approval for True Colour PIS displays and railway coach lighting.
Revenue and Net Profit: The company has demonstrated inconsistent revenue and net profit growth over the past three years. The 3-year revenue growth CAGR is 269%, while the profit growth CAGR is 130%. For the trailing twelve months (TTM), revenue growth is 397%, and profit growth is 2,467%.
ROE and ROCE:
-ROE: 60.3% (more than 15%)
-ROCE: 12.3% (less than 15%)
Price to Earnings Ratio (P/E): The Price-to-Earnings (P/E) Ratio is 34.4, which is below the sector average of 66.
Debt-to-Equity Ratio: With a debt-to-equity ratio of 0.10, the company maintains a healthy balance, indicating that it finances its assets primarily through equity.
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Spectrum Foods Ltd
Business: Spectrum Foods Ltd, a part of Saboo Sodium Chloro Limited, trades in salt and generates power via windmills. They offer spices in forms like whole, ground, and blended. Revenue comes primarily from salt sales (75%), windmill electricity (7%), share sales (17%), and other sources (1%).
Revenue and Net Profit: The company has demonstrated consistent revenue and net profit growth over the past three years. The 3-year revenue growth CAGR is 42%, while the profit growth CAGR is 39%.
ROE and ROCE:
-ROE: 100.57% (more than 15%)
-ROCE: 56.89% (more than 15%)
Price to Earnings Ratio (P/E): The Price-to-Earnings (P/E) Ratio is 27.42, which is below the sector average of 42.29.
Debt-to-Equity Ratio: With a debt-to-equity ratio of 1.33, the company relies more on debt to finance its assets.
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The risk associated with investing in penny stocks
Investing in penny stocks can be highly lucrative, but it also carries significant risks. Here are some of the key risks associated with investing in penny stocks:
1. High Volatility:
Price Fluctuations: Extreme price swings can lead to large gains or losses.
Market Sensitivity: Prone to rapid changes due to rumours and sentiment.
2. Liquidity Issues:
Low Trading Volume: Difficult to buy or sell without impacting price.
Wider Bid-Ask Spread: Higher transaction costs and unfavourable trade execution.
3. Lack of Information:
Limited Disclosure: Less publicly available data, harder to research.
Unreliable Data: Information may be outdated or inaccurate.
4. Higher Risk of Fraud and Manipulation:
Pump and Dump Schemes: Susceptible to price manipulation and fraud.
Insider Trading: Increased risk of market manipulation.
5. Poor Financial Health:
Unstable Companies: Often financially distressed with inconsistent revenue.
High Debt Levels: Risky if revenue is insufficient to cover obligations.
6. Regulatory Risks:
Less Stringent Regulations: Higher risk of encountering poorly governed companies.
Delisting Risk: Greater chance of being delisted, leading to potential losses.
7. Investment Horizon:
Long-Term Uncertainty: Uncertain prospects, with many failing or underperforming.
Patience and Timing: Requires patience and precise timing to realize potential.
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Bottom Line
In today’s discussion, we explored penny stocks with strong fundamentals and examined some key facts about them. Penny stocks often present tempting opportunities, especially when we see their success stories. A recent example is Gravita India Ltd. The stock price has skyrocketed from ₹32.30 per share in March 2020 to ₹2,486 in just four years, yielding an impressive return of 7,595.66%. We will cover this stock in our next blog.
Such exceptional returns make these stocks attractive, but they come with significant risks. As a precaution, penny stocks should constitute only 2-3% of our portfolio and must be carefully selected for quality.
That’s all for today’s post. Hope you get some valuable insights from here.
Happy reading!
Disclaimer
The blog is meant for informational purposes and serves the general analysis of the stocks. The contents provided here are based on careful research and analysis utilizing the fundamental and technical indicators over a while. The post does not consist of any direct recommendation about Investing or trading in the securities market. Thorough research and careful consideration are necessary for individuals to fulfil their responsibility in making financial decisions. Seeking professional advice before making any financial decisions is always advisable.
