Value Investing

Penny Stocks And Value Investing: Facts And Myths

Penny Stock Via Value – Edge

Ever heard of the phrase, “never judge the book by its cover”? Well, the same goes for investing in stocks, especially penny stocks. Recently, I read an article on fifth person regarding the dangers of penny stocks. While I do agree with their points brought up, however, I feel that there is this stigma attached to the term “penny stock” especially how they associate it with speculation. Every time I bring up buying penny stocks to more seasoned investors, their initial response would always be how risky it is.

In SEC terms, any stock that has a value of less than 5 dollars per share and also which is not exchanged on the major exchanges (like NYSE or NASDAQ) is called a penny stock. These types of stocks are traded over the counter and they are listed in exchange boards such as Pink Sheets or in the OTCBB. In the context of Singapore, they are just stocks trading under a dollar.

There is this misconception that penny stocks are priced so low due to reasons such as consistent poor performance, the company usually reporting a net loss or reasons to believe that there is accounting fraud. They aren’t wrong as we do see such cases such as Scintronix (T20.SI) trading at 0.1 cents due to consistent poor performance or s-chips like China Fibretech (F6D.SI) due to the public’s fear of accounting fraud. However, to just throw the baby out with the bathwater is not very fair. There are many other unloved penny stocks that are hidden gems waiting to be discovered. As long as we do proper research, we will realize that many of these penny stocks are undervalued, offering us a large margin of safety and huge potential gains. As one would observe, I owe my portfolio’s performance largely to such penny stocks. One of my darling penny stocks would be Silverlake Axis (5CP.SI) purchased at SGD0.35 and giving me a total return of over 170% including dividends within a time frame of about 1.5 years. Furthermore, if one were to actually hold the stock till now, it would translate to a total return of 237%!

Image Penny Stock
Penny Stock

To sum it up, I hope this post will help alleviate investor’s fear of penny stocks and to some extent their view towards penny stocks being riskier than blue chips. Honestly, what is risk? Imagine, Person A buys a penny stock offering 50% margin of safety compared to Person B who buys a blue chip that is 50% overvalued. To me, Person B is actually at a greater risk as he is overpaying for a stock and in the event that the share price normalizes in the long term, he is actually facing a potential loss of 50%.

Disclaimer: The authors have no vested interest in 5CP.SI, T20.SI, F6D.SI