Multibagger Stocks Under Re 1

Multibagger stocks are very popular. So are penny stocks. It’s natural for investors to look for the ideal combination of both.

But there is an extreme example of this. Some investors look for multibaggers in the list of stocks trading under Re 1.

Yes, that’s right. Stocks trading below Re 1 per share.

Penny stocks are stocks trading below Rs 100 with low marketcap and low liquidity. Hunting for multibaggers among these penny stocks is hard enough. It can also be a potentially rewarding activity if done right.

However, a stock trading below Re 1 has already fallen over 99% from the price of Rs 100, when it became a penny stock. This means investors have pretty much given up on the stock.

And there is usually a very good reason for this.

It’s very likely that such a stock is on the verge of bankruptcy or is in the process of liquidation. This means its assets will be sold off (assuming there is a buyer) at a throwaway price.

Whatever cash is raised will be used to pay the company’s creditors first. Thus, the banks will take their share of the remains before shareholders.

In most cases like this the banks too will have to take a haircut i.e. they won’t get back everything they’re owed. Thus the shareholders will get nothing.

So why buy in such stocks in the first place? Isn’t it a case of dangerous gambling?

Yes, it is. But there is another side to this story.

In some cases the company does manage to recover via a restructuring of the business. In other words, it manages to avoid a bankruptcy and the following insolvency process where the shareholders get wiped out.

In such cases the company’s shares are not worth zero. Its true value will be based on the performance of the company in the future.

This is also a big risk for investors but it’s a smaller that the risk of buying shares in a company on the verge of bankruptcy.

This is the goal behind buying a stock trading below Re 1. Investors are hoping the shares are worth much more. They’re betting the company will recover and won’t enter insolvency proceedings.

This is perhaps the highest form of risk in the stock market: All or nothing. You will either end up with a huge multibagger penny stock or you will lose your entire investment.

Are you comfortable with this kind risk?

Only you can answer that question, dear reader.

You can check out Equitymaster’s stock screener for multibagger penny stocks.