What are low priced stocks? Are penny stocks always low priced?
In stock investing it is important to define ‘low price’. General understanding is; Rs.100 is greater than Rs.50. But it can be different in case of stock investing.
A stock which is trading at Rs.100 can be considered cheaper than a stock trading at Rs 50.
How this is possible? It is a violation of the theory of mathematics, right?
But this is what makes stocks investing so interesting.
The puzzle of low priced stocks becomes even more interesting when we are dealing with penny stocks.
My readers raise queries about best penny stocks to buy. It is evident that people love penny stocks.
What are penny stocks?
Any stocks which has very low market price and very low market capitalization are often referred as Penny Stocks.
Why people like penny stocks? Because of its low market price.
Penny stocks are very light on pocket. Low price per share makes it possible for people to buy more shares without spending too much money.
To understand more about penny stocks, lets take an example.
There is a stock in Indian stock market called MRF Limited. We all know it, right? Sachin Tendulkar has batted for years with a cricket bat having MRF name imprinted on it.
Yes I am taking about this MRF Limited. This company basically makes tyres, tubes, paints, conveyor belts, toys etc. This company is also listed in BSE and NSE.
Do you know, what is the market price of MRF Limited in BSE? It trades at Rs.66,400 per share.
So if you want to buy ONE share of MRF, you will have to shelve almost 65,000 rupees. You will do it? Probably not.
Even if the market price of MRF is undervalued (trading below its intrinsic value), it will not be easy to buy even one share of MRF.
High market price of MRF, makes it tough for casual investors to buy its shares.
But penny stocks are such shares which are like tailor made for us. Why? Because of its very low market price.
Low market price makes it very attractive and convenient for common men to buy penny stocks.
But it must also be noted that because of its very low market price, penny stocks are extremely volatile.
So it is essential to take extra care before buying penny stocks.
Penny stock are very volatile (risky!)
What it means by penny stocks being volatile?
To measure stocks volatility, there is financial term called Beta. The higher is the beta, more volatile is the stock price.
Market price of high-volatile stocks fluctuate too rapidly.
Market price of low-volatile stocks are comparatively steadier.
High-volatile stocks has high beta. Low volatile stocks has low beta.
Stocks having beta more than one, means market price of this stock is more volatile compared to the Index (like Sensex or Nifty).
Suppose a stock has beta of 1.3. It means, if Sensex moves down by 10%, its stock price is likely to go down by 13%. Similarly if Sensex goes up by 10%, stocks price (of beta 1.3) is likely to go up by 13%.
Generally speaking, Beta of penny stocks remain high (above 1). Though it is not true for all penny stocks.
As market price of penny stocks move more rampantly compared to the index, hence it is often referred to as risky and volatile.
So investors must take extra care while investing in penny stocks.
Penny stocks to buy having low market capitalization?
Though I am not an expert of penny stocks, but according to me taking a calculated risk with penny stocks is better.
So what I do when I have to deal with penny stocks?
I prefer those penny stocks having comparatively larger market capitalization. This is not a fool-proof strategy, but it works reasonably.
If someone does not have too much exposure in the stock market, investing in low cap penny stocks can be risky.
There is a difference between how a traders looks at penny stocks and how an investor must look at these stocks.
An investor must handle penny stocks differently.
One step in doing so is to, go for deeper fundamental analysis of penny stocks.
If one is not in a position to do fundamental analysis, opting for higher market cap penny stocks can give some protection.
Look at penny stocks like an investor and not as a trader
If fundamentals are bad, no matter how low is its market price, investors will avoid such a stock.
This is a reason why expert investors never looks at market price of stocks in isolation.
The trading price that we often see, is very misleading. In fact it says nothing about its underlying business being good or bad.
Hence is always necessary to perform fundamental analysis before committing to a penny stock.
Only after fundamental analysis, that one can really know if the stock is low priced or not.
If you have to identify if Rs.100 stock is or Rs.50 stock is cheaper, fundamental analysis is a must. Price numbers alone say nothing.
What are low Price Stocks? They trade at discount to its intrinsic value.
But it is not easy to estimate intrinsic value of stocks, right? Yes.
There is an easier alternative available to check if stocks can be tagged as low priced stocks. One can use financial ratios to evaluate if a stock is trading at cheaper price.
These financial ratio is a great tool for common people who are not very conversant with analyzing financial statements.
Even if the market price of stock is very low, even if its market cap is high, all stocks must pass through the screening of financial ratios.
Which financial ratios can be used to identify low priced stocks?
Price Earnings Ratio (P/E)
Price earnings ratio (P/E) is one of the most used valuation tool in stock market. It compares market price of stock (P) with its Earning Per Share (E). As a rule of thumb, P/E ratio multiple of 15 is considered reasonable.
Price Earnings Ratio = P/E
P=Market Price, E=(PAT-Dividend Paid on Preference Shares)/(No. of Shares)
Price to Book Value (P/B)
Price to book value (P/B) is again one of the most followed financial ratio of stock market. It compares market price of stock (P) with total shareholder’s equity per share / book value per share (B). As a rule of thumb, P/B ratio multiple of 1.5 is considered reasonable.
Price to Book Ratio = P/B
P=Market Price, B=Book Value per Share / Net Worth Per Share = (Share capital + Reserves)/No. of Shares).
Dividend Yield (D/P)
Dividend yield is one of the most reliable stock valuation tool available for investors. It compares market price of stock (P) with dividend/share paid to shareholders(D). As a rule of thumb, D/P multiple of more than 0.03 (3%) can considered reasonable.
Dividend Yield = D/P
P=Market Price, D=Dividend paid per share in last FY.
PEG ratio is an extension of P/E ratio of stocks. We discussed that P/E ratio of less than 15 is considered reasonable. But in calculation of PEG, companies earning growth rate (EPSG) is considered for valuation.
A fast growing company will be considered reasonable even it P/E is high. As a rule of thumb, PEG multiple of less than 1 is considered reasonable. If purpose is to find low priced stocks, PEG ratio is one of the most reliable tool.
Price Earning Growth Ratio = (P/E)/EPSG
P=Market Price, E=(PAT-Dividend Paid on Preference Shares)/(No. of Shares), EPSG=Earning Per Share Growth Rate in last 3 year (5year growth can also be considered).
Price to Sales (P/S) Ratio
Price to sales ratio is same as P/E ratio. Here instead of using earning as comparator one uses sales turnover. Companies PAT figures can be manipulated in financial statements. But sales turnover is hard to manipulate.
These days expert investors consider P/S ratio as more authentic than P/E ratio. Low P/S ratio will provide better valued stock than a low P/E stock. As a rule of thumb, P/S multiple of less than 1.5 is considered reasonable.
If purpose is to find low priced stocks, P/S ratio is a very good tool.
Price to Sales Ratio = P/S
P=Market Price, S=Sales Turnover.
Conclusion – What are Low Price Penny Stocks?
In this article, we will consider those penny stocks which trade at a market price of Rs.65 and below.
We will consider only those penny stocks whose business fundamentals are reasonable.
Price valuation of these stocks are also done using financial ratios. One use these ratios to judge if the stocks is undervalued or overvalued.
Famous stocks like TCS, RIL, HDFC, ITC etc are hardly available at undervalued price levels.
But it is easier to find penny stocks which are undervalued.
Lets make our own list of penny stocks and start tracking their price movements.
Looking only at price is not useful. Comparing market price of stocks with its sales, earnings (Profit), earning growth, net worth, operating cash-flow etc gives great insights.
Low Priced Penny Stocks to buy in India in 2017
Size of Company and its Debt Levels
|SL||Company||Sector||Price||Size of Company (M.Cap)||Market Cap (Rs.Cr.)||Enterprise value Minus Market Cap (Negative is better)||Debt Equity Ratio|
|1||KMC Speciality Hospitals (India) Ltd.||Healthcare - Health Services||23.10||Very Small||392.22||5.47||0.33|
|2||R Systems International Ltd||Technology - Computer Software||50.45||Small||626.58||-120.65||0.01|
|3||Kunststoffe Industries Ltd.||Chemicals - Plastic tubes & pipes||28.60||Very Small||18.78||-0.25||0.00|
|4||Pasupati Acrylon Ltd.||Textiles - Synthetic Yarn||27.00||Very Small||241.55||-25.81||0.25|
|5||PTL Enterprises Ltd.||Services - Trading||55.20||Very Small||370.66||-16.52||0.00|
Profitability and Growth
|SL||Company||Sector||Price||ROE (%)||Operating Margin (%)||Revenue Growth (5Y)||EPS Growth (5Y)||Book Value Growth (5Y)|
|1||KMC Speciality Hospitals (India) Ltd.||Healthcare - Health Services||23.1||36.36||22.4||22.72||49.27||9.24|
|2||R Systems International Ltd||Technology - Computer Software||50.45||20.63||14.17||7.51||26.6||6.94|
|3||Kunststoffe Industries Ltd.||Chemicals - Plastic tubes & pipes||28.6||7.2||38.2||28.43||47.23||16.65|
|4||Pasupati Acrylon Ltd.||Textiles - Synthetic Yarn||27||32.51||15.3||3.12||42.68||22.95|
|5||PTL Enterprises Ltd.||Services - Trading||55.2||26.75||94.97||4.56||11.85||14.86|
|SL||Company||Sector||Price||Enterprise Value / Ebidta||Price / Sales||Current PE||PEG (5Y)||P/B||Market Cap / Free Cash Flow (Lower is better. Negative is not good)|
|1||KMC Speciality Hospitals (India) Ltd.||Healthcare - Health Services||23.1||29.92||6.16||60.51||1.23||14.49||105.15|
|2||R Systems International Ltd||Technology - Computer Software||50.45||8.69||1.05||17.93||0.67||2.14||14.69|
|3||Kunststoffe Industries Ltd.||Chemicals - Plastic tubes & pipes||28.6||13.78||2.97||38.01||0.80||3.97||93.90|
|4||Pasupati Acrylon Ltd.||Textiles - Synthetic Yarn||27||4.63||0.48||12.68||0.30||1.84||21.23|
|5||PTL Enterprises Ltd.||Services - Trading||55.2||6.29||6.9||10.16||0.86||2.36||14.67|
|SL||Company||Sector||Price||Size of Company (M.Cap)||Return for Investors in Last 5 Years||Return for Investors in Last 10 Years|
|1||KMC Speciality Hospitals (India) Ltd.||Healthcare - Health Services||23.1||Very Small||53.3||59.05|
|2||R Systems International Ltd||Technology - Computer Software||50.45||Small||24.48||18.48|
|3||Kunststoffe Industries Ltd.||Chemicals - Plastic tubes & pipes||28.6||Very Small||41.97||29.69|
|4||Pasupati Acrylon Ltd.||Textiles - Synthetic Yarn||27||Very Small||45.48||19.07|
|5||PTL Enterprises Ltd.||Services - Trading||55.2||Very Small||11.16||7.46|