Penny stocks: Beautiful but dangerous

07 Feb, 2020 - 00:02 0 Views

eBusiness Weekly

Tawanda Musarurwa

With the Zimbabwe Stock Exchange (ZSE) largely underperforming last year resulting in a general shift by investors towards the better performing penny stocks, analysts say there are still ‘significant’ risks that come with this segment.

Penny stocks are common shares of small public companies that initially trade at low prices per share.

Expectedly, there was a rallying in penny stocks trades over the course of last year.

Official data from the bourse shows that five of last year’s 10 best performing the 10 penny stocks firms with share prices at 10c and below — recorded year-to-date (YTD) growth in excess of 100 percent.

Zimbabwe Property Investments (ZPI) had a YTD performance of 126,2 percent, followed by Star Africa Corporation (173,1 percent); Dawn Properties (192 percent), and Willdale (259,8 percent).

MedTech had an impressive YTD performance in 2019 of 7 500 percent.

But despite the natural tendency for some investors to gravitate towards penny stocks when bell-weather stocks’ performance has been dragged down by a difficult macroeconomic environment, they have their own share of risks.

Analysts say despite having managed to outdo the challenging economic environment, characterised mainly by limited foreign currency, poor electricity supplies and inflationary pressures during the course of last year, penny stocks are ‘highly speculative’.

“We highlight that such stocks present high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks can be highly volatile and subject to manipulation through ‘pump and dump schemes’.

“Another risk is that penny stocks have little liquidity, so holders of shares in penny stock companies often find it difficult to cash out of positions,” said analysts at Morgan & Co.

“In most cases, a small percentage of penny stocks on a given exchange have truly novel high demand products, while they commonly experience short-term explosive trends on varied news-flow.

“These rocket stocks can jump 55 percent to 99 percent of a climax after several hours to a few days without reliable technical warnings and may then plunge at a time when most investors least expect it.

“This means that such stocks could prove to be high risk and high reward investments. Penny stocks are considered to have higher risk and higher potential rewards than most other “more conventional’ investments.

“Their speculative value can be extreme, while their visibility and accessibility of operational results is usually very poor.

“Few financial professionals venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these highly explosive shares may do.”

The performance of the ZSE is projected to remain depressed, at least into the first half of 2020, and indications are that the local bourse’s penny stock rally might continue.

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