Interested in penny stocks? Here's a warning! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Interested in penny stocks? Here's a warning! 

A  A  A
In this issue:
» Dr. Doom favours Indian banks, real estate
» BRICs seeing big money flows
» Indians leaving their mark on corporate US
» Wall St. bankers got it all wrong, and so did their teachers
» ...and more!!


------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.

---------------------------------------

00:00
 
Have you ever heard of Avance Technologies, Kaleidoscope Films, or G-Tech Info? We didn't, that is until today. As we were looking at some of the best performing stocks of 2009 across all categories, we came across these and were amazed to see their 12-month returns that ranged between 500% and 2,500%!

All these stocks are part of the category we know as 'penny stocks. Penny stocks are those having share price in single digits or low double digits. And seeing their returns, we can say for sure that these stocks are back in the limelight!

Investors' interest in penny stocks is not difficult to understand. Most large, mid and small cap stocks are back to trading at high valuations. As such, the 'cheap' valuations of penny stocks are acting like bait for investors in search for new stock ideas.

And if you are amongst those lured by the dirt-cheap valuations of such stocks, here's a word of warning. Penny stocks can become even cheaper as there are little or no earnings or track record to back whatever valuations they enjoy. While these stocks might record big gains within a short period (as seen above), these gains are largely owing to extremely low liquidity rather than any fundamental reasons.

So the next time someone tips you to buy those 'hot' penny stocks, remember that he might be looking for a bigger fool to buy his holdings in such stocks - many of which are just worthless pieces of paper!

00:59  Chart of the day
Today's chart of the day shows a comparison between annual returns of Indian and US stocks versus gold (denominated in Indian rupee). And clearly, Indian stocks and gold have outperformed US stocks over the past 10 years. A mix of good economic and corporate performance has titled the balance in favour of Indian stocks. As for gold, investors have lapped on to the yellow metal fearing a collapse of the US dollar, which is now looking a near certainty!

Note: Indian rupee denominated gold prices used for calculation
Data source: Prowess, Yahoo Finance, Gold.org

01:27
 
Investment guru Marc Faber has always been known for his independent and bold thinking. No wonder then that it is always interesting to know his take on investments. Especially when the crowd is so often turning out to be wrong. Thus when in a recent interview he listed his top contrarian picks from across the world for 2010, we were all ears.

Among other things, Faber is very bullish on the banking and real estate sector in India. He believes that banks in India did not play in the CDO (collateralized debt obligations) market and mortgage backed securities market. So for the banks that are well run, there is a huge opportunity. As for real estate, he sees urbanization accelerating at a fast clip in India. There will be entirely new cities coming up. So there too he sniffs big opportunity in Indian real estate over the long run.

While we must say that India's scope for development does hold a lot of potential for these sectors, making sure that one invests in fundamentally strong companies at the right valuations is of utmost importance.

02:11
 
BRIC nations - Brazil, Russia, India, and China - are seeing a higher share of global investments coming their way. This is if one is to believe a report on a leading business paper today. The report cites EPFR Global a tracking agency for global fund flows. Its stats show that BRIC-focused equity funds have already seen inflows of US$ 20 bn during the first nine-months of this year. Importantly, this is almost 40% of funds of all emerging market stock funds.

Such large fund flows into BRICs are not without reason. Stockmarkets in these countries have risen sharply over the past 12 months. The MSCI BRIC index is up almost 90% in 2009 as compared to 70% gains recorded by the MSCI EM (emerging markets) index.

Apart from the promise of better returns, and as compared to developed markets, the BRIC economies also promise a better economic future for the coming few years. India is one clear case in point here. And if one has this conviction that the coming decades are going to be extremely bright for India and stays invested in the right kind of stocks, he will be glad that he pulled the trigger.

02:59
 
Anyways, Indian markets traded strong today. The BSE-Sensex was trading with gains of around 480 points (2.9%) at the time of writing. The BSE-Midcap and BSE-Smallcap indices also followed suit, trading with gains of 1.4% and 1.5% respectively. Energy and IT stocks led today's gains in India, which closed as the best performer among all Asian markets.

Gold is trading marginally lower. The metal has now touched its 7-week low of around US$ 1,086 an ounce owing to a rising US dollar.

03:19
 
When it comes to criticizing Wall Street investment bankers, there may be few adjectives that have been spared in the last twelve months. However, it seems that the bankers are not the only ones to be blamed. Their alma mater has also got it all wrong when it came to judging risks. 'How to invest profitably' is not a lesson that only the bankers need to learn. The school that produces most of the Wall Street honchos has been one of the biggest victim of poor risk management.

We are referring to one of the most renowned business schools in the world - Harvard Business School. To fund its expansion plans, the school invested in interest swaps. In December 2004, the institution bought swaps on construction bonds worth US$ 2.3 bn. The Fed rates were then 2.25%. With the Fed slashing interest rates to near zero, Harvard University has had to bear losses of a staggering US$ 1 bn.

The crisis has taught some very important lessons. To the bankers and to their teachers!

03:57
 
It appears that Indians are leaving their mark on corporate US in more ways than one. Forbes has come up with a list of what it calls 'Eight Indian Flavoured CEOs'. It highlights how US immigrants of Indian origin have managed to get into the boardrooms of capitalist US. It shows how they are at the helm of affairs of corporations that rule the world.

Some names from the list that make India proud are Indra Nooyi (PepsiCo), Vikram Pandit (Citi), Francisco D'Souza (Cognizant) and Shantanu Narayen (Adobe) among others. However this number is still negligible in context of the huge immigrant population of Indians out there. Nevertheless, it is much better than zero a decade back. In short, Indians are making great headways towards ruling global corporations. Also they are fairing much better than the other immigrants in the US!

04:27
 
Food inflation may be giving consumers, government and the central bank sleepless nights. But the deputy head of planning commission, Dr. Montek Singh Ahluwalia is very sanguine about bringing it under control. Rise in food prices that has been to the extent of 20% YoY in recent days has played havoc with the average consumer's budget. The same has been particularly worrisome given the draught like situation this year. However, Dr. Ahluwalia believes that most of the price rise is speculative in nature.

He expects food supply to catch up in the coming months thereby bringing the inflation under control. However, we believe that lower crop yield, shift to cash crops and higher income in rural areas is unlikely to bring the prices lower anytime soon.

04:54  Today's investing mantra
"All investment evaluations should begin by measuring risk, especially reputational." - Charlie Munger
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.

Equitymaster requests your view! Post a comment on "Interested in penny stocks? Here's a warning!". Click here!

9 Responses to "Interested in penny stocks? Here's a warning!"

Mahesh

Dec 28, 2009

Excellent analysis, crisp and to the point.I would like to know with graphs and data how GDP is related to equity market growth.

Like 

ram srinivasan

Dec 25, 2009

Friends...

Stocks to shine in 2010, offcourse the ifrastructure sector, alongside wind power generation sector, especially indowind energy and suzlon energy.. NTPC and ONGc to be looked for...


Mphasis and Educomp to be looked for ..

FCS software and nucleus software to be looked for..

TCS and infosys to be looked for...

Vijaya bank , IFCI Ltd , UCO bank , ICICI Bank to be looked for..

Maytas infra ,unitech infra and developers , DLF to be looked for...

Deep industries in oil and gas exploration side to be looked for ,, reliance power to be looked for..

ACC cement and shiva cement to be looked for..

Cheers,,,

Like 

DKAGGARWAL

Dec 24, 2009

GOOD, KINDLY KEEP UPDATING ME AND OTHERS, BEST WISHES,
SEE IF YOU CAN GIVE SOME GOOD STOCKS FOR BUY/SELL
WITH REGARDS,AND BEST WISHES
DINESHKAGGARWAL

Like 

R Venkata subramanian

Dec 24, 2009

Dear sir,
Your commentries are very good, balanced and educative. Objective analysis is very much needed when all indications in the stock market is suggesting that it is heading for another bubble, all set to suck out many thousand cores of the hard earned money of the ordinary investors who are having very little access to the valuable information.
It is suggested, whenever comparisions are made, along with US, Chaina must also be taken into account. The fear of dragon at out doorstep may induce us to correct our error in national developmental strategies.
Keep it up.
Best wishes
RVS Manian

Like 

kanu

Dec 24, 2009

always penny stocks r not risk.

Like 

venkat

Dec 23, 2009

good one

Like 

sunilkumar tejwani

Dec 23, 2009

Dear Sir,
If Mr Mark FAber is bullish on Indian Real Estate, then he should first look at the opaque & perverse financial system prevailing in the sector. All real estate companies in general take around 30% in black (cash) component & the balance 70% in white (cheque). In such scenario does he think they will report financial numbers honestly? The black component directly goes into the pockets of promoters leaving little profit on the company's books & the minority shareholder is left in the lurch. The recent raids on HDIL & DLF is anything to go by, huge unaccounted cash was found in the promoters cupboards, the rest is history.

Therefore investing in Indian real estate company shares makes little sense, except the high beta & volatility factor, a trader's delight.

When food inflation is around 20% a common man is left with little savings & little investment.

Regards,

Sunilkumar Tejwani

Like 

sethu

Dec 23, 2009

Yes..very true..many so called analysts are already recommending to buy such stocks showing the huge returns those companies showed..Retail Investors have to be very careful..such investments could easily make one lose his shirt..

Like 

kbr prasad

Dec 23, 2009

TODAYS OBSERVATIONS ARE QUITE APPEALING AND NEAREST TO
APTNESS, EXCEPT YOUR OBSERVATION ON INFLATION. INFLATION
CANNOT BECONTROLLED UNLESS CORRECT MEASURES SUCH AS STOPPING THE FORWARD/FUTURES TRADING AND HIGH INTEREST
RATES TO FMCGS, AND ALSO HOLDING STOCKS BY WHOLESALE
DEALERS. STRICT MEASURES HAVE TO BE TAKEN BY STATE GOVERNMENTS AND CENTRAL GOVERNMENT IN THAT DIRECTION
TO SAVE THE POOR CITIZENS OF INDIA AND ALSO THE ECONOMY
OF THE NATION AND FASTER DEVELOPMENT OF THE COUNTRY WITH
OUT ANY RESERVATIONS.

Like 
  
Equitymaster requests your view! Post a comment on "Interested in penny stocks? Here's a warning!". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407