Penny Stocks for 2022

Aug 3, 2022

Brijesh Bhatia, Research analyst

Penny stocks have been a rage in the stock market for the last two years. Despite all the volatility in these stocks, they remain very popular.

In this video, I'll explain in detail how I go about identifying multibagger penny stocks using charts.

Watch the video and let me know your thoughts. I love hearing your feedback.

Hello, subscribers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

In this video, I'll be discussing about the penny stocks for 2022 or investing into the penny stocks and how to choose, especially the multibaggers when you are looking for a penny stock.

The idea to do this video was the viewer's choice.

Viewer's Choice


If you're following on my telegram channel, I've done a poll asking that when the markets have rallied right from 15,200 back to the 17,400 levels, should you invest into the penny stocks or is it the right time to invest in the penny stocks? 44% of the voting was that we want to invest into the penny stocks, and that was the viewer's choice why I am doing this video on investing into the penny stocks.

Revealed: Alert: Discover Richa's Top 3 Stock Picks for 2023...

So there is a theory which I generally follow when it comes to the penny stock or the smallcap stocks or microcap stocks before investing. I just take through what are the important things you should look into the markets when we are buying the penny stocks.


So first is the market trend. A smallcap or penny stocks move where the markets are into the bullish trend. I'm not looking at a bullish trend of a day or a week. I am looking for a bullish trend of a quarter, of six months of one year, of two years, of three years.

If you remember, I've been consistently doing the videos on midcaps and smallcaps indicating that they will outperform against the Nifty 50. In 2021, it was exactly what smallcap index has done where index has rallied much more than the Nifty rally.

Even if you look at the midcap, it also rallied much more than the Nifty in 2021 and that kind of market is very, very important when it comes to the penny stocks or this smallcap stocks. So yes, market trends play a key important role.

Second is the holding of promoters, holding of the DIIs, holding of institutions. What are the percentage of the holdings into these fronts? And there are various mutual fund as well, which are focusing on the smallcaps and many a times when you are looking or analysing the mutual funds with the smallcaps there is a return with a start or a bracket that it is a very high risk fund.

The reason is because the penny stocks are generally the high risk, or the smallcaps a generally the high risk instruments into the equities space.

The third is the dream business model, or it is a trustworthy of the business plan and management, which is very, very important as well, because the management plays a key important role when it comes to any company and in the smallcap or the penny stock company, the boos could be in an office, which could be in a small, I would say, a cabin where they are sharing the position and there the company is listed.

So you need to check such kind of stuff. Is this the just a cosy office and a dream business to sell it? Or is the business plan and management trustworthy to invest into the smallcap or the penny stock?

And what is the moat into the business, which is very, very important when it comes to the any company not only the penny stocks but when it comes to the penny stocks, they are very small compared to the giants of the industry.

So here it is very important how they will beat the larger giants because if, in case they don't have that, I would say the extra effects of the business model, they can't compete with the giants. So they need very, very important factor which will keep them apart from the giants. So these are kind of some of the fundamental factors which you need to know before investing it to the smallcaps.


When to buy the penny stocks? As I highlighted market trends play a key, important role and that should be medium to long term. I'm not looking at the short term for a week for a couple of weeks, for a month, but yes, medium to long term, which means that it can vary from six months or two quarters to probably a decade.

This is a key important role because markets if they are not going higher, these stocks will not go higher, and when the market falls, we all know that when the market falls, the correction into the smallcaps and midcaps are much more than the largecaps.

Similarly, if you look at the last couple of months especially in 2021 we corrected right from 18,600 to 15,200 which was nearly a 17-18%. But at the same time, we look at the midcap and smallcap, they were down the around 30 to 35%. It is the index I am talking about. Looking at the stocks, they may go much, much lower compared to the largecaps. So you need to keep a watch on the market trend. It's very, very important.

I believe in a technical theory, which is accumulation and re-accumulation. I'll discuss in this video as well. This video may be slightly longer, but I would request you watch it till the end because this theory will be very, very important and it's the simplest theory which I generally follow and you can follow on any free website as well.

The re-accumulation phase is the best phase to invest in this kind of stocks and the volumes indicate on the consistency on the weekly scale, a huge accumulation has happened and I use this factor called the U-theory of volumes. I'll explain what kind of theory it is all about, but it is very, very important for me when such kind of theory is being seen on to the chart before buying on the stocks. I'll share some examples as well.


So this is a Wyckoff theory, a model which I generally follow onto the buying the penny stocks. There is accumulation phase where the small buying happens, and this general takes months and years to happen into the accumulation phase.

The smart investors or institutions are buying in a small, slow and steady pace, which is not known to the retail investors. Then there is a mark-up phase, a mark-up leg ahead of re-accumulation and the re-accumulation phase, you see on your screen, is very, very important for a retail investor to keep a watch on.

That's the time and that's the best phase I would say a retail investor should invest into the stocks. If you are able to analyse the accumulation when that is the best one. But in case you don't see the accumulation phase, the re-accumulation phase is still a best way where stocks can go 10x, 20x, 30x, 40x, 100x also. So re-accumulation is one of the best phases one should look at.

In the re-accumulation phases, it also gives a confirmation that the stock has formed the basing structure, the bottoming structure but yes, in the re-accumulation phase, you need patience as well. It can go into the months, it can go into the years as well, the re-accumulation phase. You need to have the kind of patience when you are investing into the re-accumulation phase.

Then comes the mark up and above the mark up, there is a distribution phase. I am not much focusing on the distribution phase much as of now, but there are some key important aspects you need to keep a watch in distribution phase where stocks go 50%, 70%, 80% down as well. So you need to keep that in mind.

These are some of the basics stuff, which I have highlighted. There is a lots of media coverage happening on to that kind of stock. And remember that stock may elevate from smallcap to midcap, midcap too largecap, and I'll show some examples as well.

When midcap moves into the largecap, the shareholding patterns also changes. So you need to keep a watch on that but if it that stock continues to remain a smallcap, the media coverage it would be the short term media coverage because the stock is into the top gainers, the volume breakout, the volume buzzers, all sort of momentum when that stock is trending, so that could be the media coverage. You may receive any number of WhatsApp forwards on the same stock, which is also a sign of caution I would say when it comes to this smallcaps.

The big two changes you should keep a watch on is the fundamentals that probably not the same, which was in the accumulation and re-accumulation phases. Are the things are turning worse of bad for the company?

And the fourth, which is the most important went comes to the technical theory, is the volumes are decreasing at this last leg of the rally.

When the volumes start decreasing into the last leg of the rally, it means that the strength of the bulls are tiring out. We may see some selling pressure coming into the distribution phase. So you should keep a watch on that.

But in this video, I'll be more focusing on the accumulation and re-accumulation phases. So let's start with some of the examples over here.

 

Look at Bajaj Finance right in 97, 98, 99. The stock was trending into Re 1 to Rs 2 or lower than that and then look at in the accumulation phase, the bottom black rectangle if you see, the accumulation has happened and look at the volumes.

If you look at the volumes, I have drawn the orange lines into the U form. That's the U factor which I was talking about. Look at the volumes. There was an uptick in the volumes. Then the volume dried down and we have seen again an uptick in the volumes.

So these volumes play a key important role when it comes to the accumulation phase. And if you look at the accumulation happen, you may not know at that time Bajaj Finance, though it was a Bajaj company a reputed one, but you never know the company will make what kind of upside levels. So I am just ignoring that level, that accumulation happened.

But look at this second right hand side where I have drawn the black rectangle again and look at the volumes on the lower panel. Again a U structure is forming.

The volumes were higher, then volumes were lower and again, volumes picked up. So with the re-accumulation, that is the time an investor, a smart investor, or retail investor, should look at such kind of stocks when the re-accumulation happened. And look at the momentum.

 

Look at the next chart over here, which again, after 2008 and again 2008 was known that it was a recession fall, a global recession happened and look at the V-shaped recovery and post that, look at the volumes. A huge factor of volumes which I generally follow at the higher level.

Again, as I said that patience would be tested into the re-accumulation phase as well, and re-accumulation happened back after the fall and look at the momentum. It was trending around 60-70 rupees and the rest is history. We are trending at around Rs 7,000 onto the Bajaj Finance which is 70-7,000. That is 100x.

So such kind of re-accumulation needs to be a thoroughly be seen. It's simple. Go to any website. I use TradingView. You can go to investing. You can go to our Equitymaster website. Type any ticker you want to check add volumes into the charts, and you can go to the weekly and look at these volumes.

If you see a consistent U shaped structure into the volumes phase, that's the time you should keep a stock onto the alert. Look at some more examples as well.

 

Nilkamal. Look at the 2009. Again I would say 2009 was a V-shaped recovery and accumulation phase for Nilkamal because that was the first time where we have seen such kind of huge volumes come back into the stocks.

In case you, have missed that rally, back in 2014, 15, 16, look at the volumes. Again a U factor. Again look at the price going higher with the huge volumes. So re-accumulation has happened in the same way.

Stock was trading at around 450, 460, 500, 550 levels, 600 levels, and look at the volumes. And now what a kind of levels we are trading in Nilkamal. So it has gone multi X into the stock as well. So you need to keep a watch on such kind of stocks.

 

Dhanuka Agritech is the next example. Look at the accumulation phase which happened for years between July 2011 to probably 2013, last quarter of 2012 I would say. The accumulation happened, the slow and steady volume increase, look at the re-accumulation happened right at around 130, 135, 140, 150 levels and look at the U factor volume theory.

Again, the re-accumulation happened and now the stock is trading somewhere around, I guess 600-700 levels. Again, it is gone up X from the level of re-accumulation. So you can keep a watch on such kind of stocks.

One chart I want to highlight where you should avoid such kind of stocks.

 

Again, you may see such kind of examples, a number of example into the penny stocks and smallcap stocks, i.e. the stock going circuit to circuit. What is happening? There is a daily limit of 5% into a stock which hits at open or at the close on a positive side or on negative side.

I would avoid such kind of stocks. If you look at the chart over here, look at the volumes on the downside. There was 2-3 weeks of volume. Then again, no volume. This is not a U factor because it was a sudden increase for 2-3 weeks and again there is no action coming in. There is no follow up of volumes coming in.

The U factor lacks into the stock. Though the stock has gone from around 40-50 paise to Rs 8-9, but I would still avoid such kind of stocks because I haven't seen much kind of volumes. And then it went down. Now it's trending somewhere around Rs 4.5-5.

I would suggest avoiding such kind of stocks where you don't find U factor kind of volumes because the reason to find the U structure or U factor volume theory is because you get a follow up volume theory, follow up buying happening into the stocks, which is not the case in this current example. And that is the reason I have highlighted this stock because there was a lack of follow up volume coming into the stocks.

So that is the U factor theory I follow. In case you have any doubt on this theory, you want to add any oscillators, you can message me in the comments. I'll try to reply as much as I can, and definitely investing into the penny stocks, I still believe smallcaps and midcaps are in a comfortable position where you should look for an investing avenue.

If you remember, if you are watching my daily videos, I have highlighted in today's video as well. The midcap index is coming back very, very strongly. So yes we are having a much bullish trending months and quarters to come into the markets and a stay invested and have a profitable year.

Signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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