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Fundamental Analysis of 3 Small Cap and Penny stocks | How to invest in Penny Stocks
In this Post with the video, I will explain how investing in good companies at a starting stage can help you in the long run. I will also show 3 companies on which I am betting on for the future
Let's start with a Story Of Mr. PRUDENTJ2 JOSHUA to help make this article concise and understandable.
Mr. PRUDENTJ2 JOSHUA invested in Titan at a very early stage. Now he's holding approximately Rs. 8000 CRORE worth of shares of Titan alone!
So in a few decades, Mr. PRUDENTJ2 JOSHUA has increased his investment amount and now his total network in Titan is around eight thousand crore dollar in Titan alone.
Forget about the entire stock portfolio. That is just mind boggling. He has around eight thousand crore in Titan stocks.
The lesson from this story is very simple, that when you as an investor pick really good companies and they are small and you invest big amounts in it and hold that investment for decades, or years then you can become extremely, extremely rich, like Mr. PRUDENTJ2 JOSHUA now, this is the same philosophy with which Mr. Warren Buffett also operates.
Benjamin Graham, Ray Dalio also operate so understanding how to identify good penny stocks or good small companies is a very important skill. So please consider this Article only from educational purpose.
I'm going to show you three specific penny stocks that I'm keeping a track of.
I'm not saying I'm investing.
I'm keeping a track of, for now, these look really good to me.
I continue to monitor how these are going and I'll share updates with you. So please stay tuned until the end of this Article. And towards the end of the article, I'm going to tell you why did PRUDENTJ2 JOSHUA actually invest so much money in Titan early on, so that will act as a very important lesson.
Just to kick things off, let me quickly explain what penny stocks are Now.
What is Penny?
Penny is essentially a money denominator that is used in the US. So we consider penny stocks as stocks that are trading at a small fractional amount that is what penny stock means. And these are usually reserved for companies that are very small in nature.
The businesses are very small. We have great growth prospects. So let's understand this from an example of titan itself.
As you can see that back in 2000s, early 2000s, Titan was trading at three rupees four rupees five rupees etc. and now, like in the next 20 years, it has gone up to 1840. That is the training price today.
In a span of a few years, Titan has given massive returns. It has given approximately 24625% return so that is the return from which PRUDENTJ2 JOSHUA has massively profited.
If you can identify really good companies early on. So back in early 2000s, Titan was literally a penny stock. It was a very small business. It's not as if that it was displaying massive profits. It had stable cash flows. But PRUDENTJ2 JOSHUA looked at certain things, made the investments and he reeked benefits out of it.
Now, let me quickly clarify the definition of penny stocks in the US.
Many stocks means that these are stocks that usually trade at $5 or less that is the general consensus there is no set definition of penny stocks perse.
In India, if you extend that definition, it will apply to companies that are small businesses or small firms. And this is typically less than five thousand crore. You would say that hey ,Akshat ,5000 crore is a huge amount.
So how is this a Penny stock. So essentially what it means, is that the size of the company is small, so it is growing from a small base.
Back in 2000s,early 2000s. This is what Titan would have looked like, very small company ovuuer the years. It has become like this this big. So it has grown. The point that you need to take away is that rather than getting fixated on the exact definition of penny stocks, you must consider these as small cap stocks and you must understand certain features of penny stock.
The first and foremost feature of a penny stock or a small cap stock is that they have great growth potential, very similar to the way it happened for Titan.
Other small cap companies exist in the market right now. If we bid on those companies right and sit tight, we will become super wealthy. So this is the first feature that they have great growth potential.
Now, with great growth potential comes great risk. So there is a lot of volatility that the share prices will go up and down, up and down, so on and so forth.
Even for Titan, you can see that during this phase, during this entire phase of approximately four to five years, the stock did not do much, right.
In fact, it stayed almost consistent and it did not give any massive returns. So this is the second key thing that you must be OK with, that there will be a lot of volatility in terms of investing in penny stocks or small cap stocks. And you have to stay put if you are made your decision that, hey, I'm betting on this industry, betting on the sector, if I'm betting on this industry and company, then stay put.
Otherwise, you're not going to get returns the third feature of a penny stock is that they grow with the economy right now, this is where I'll give you the answer that Why did PRUDENTJ2 JOSHUA invest in Titan back in early 2000s. So in the early 2000s, Biden had two divisions.
One was called as time division and one was called as jewelry division the time division was giving massive business to titan, and that was what people were betting on.
The time division of the company will grow and they were valuing Titan from that angle. But, PRUDENTJ2 JOSHUA thought that you know what, the jewelry business is growing. And it is going to go up as India progresses because people have this affinity to buy gold jewelry, Tanishq also got established during that phase and that the jewelry business of Titan to the next level.
And over the last two decades has been a massive growth story which has benefited the entire Titan stock.. So Mr. PRUDENTJ2 JOSHUA was not betting on the time component or the watches component of titan, he was betting on the jewelry business.
Why was he betting on the jewelry business? Because he linked it to the Indian economy. He said that I'm very bullish about the Indian economy, especially around the jewelry sector. He made investments in Titan, massive investments in it, and now he's benefiting.
So similarly, you and I as investors, our lesson is that we must also be on the lookout for such investment opportunities.
Now, let me talk about three specific penny stocks that I'm keeping a close track of again, this is not an investment advice. I'm keeping a close track of these stocks. I'm going to buy, one of the stocks I'd already bought. Sold it, I'm going to re-enter again after a bit. So I'm going to talk about stocks. So let's get started.
Three specific penny stocks that I'm keeping a close track of again
The first penny stocks that I'm bullish about is called Manali petrochemicals. Now, before showing you what this company does and what its financials like and what are some of the good things here? Now the share price is trading at 92.65 and it is a small cap company.
Have I bought the stock? No. I'm just keeping an eye out on it because a lot depends on how things progress. So let us quickly check the financials of this company so you will see that their revenues have been growing for this company. And this is what I love to see right now.
The revenues, especially if of a penny stock is growing. It shows that, you know what,the promoters or the management of the company is probably good. They know how to grow the revenues.
Now, are they doing it profitably? So let's take a look at it. It seems like it , that's OK.
The revenues have grown from fifty seven point eight in 2018 to approximately 4x to two hundred and one crores. but this looks good. So the company itself seems to be fine. So this is a checkmark.
Now that small cap companies, you must be very considerate about the debt that these companies have and in which environment they are operating.
So the macroeconomics or the industry of the company looks bad. Then please do not invest. For example, if you feel that these days the traditional automotive companies, automotive companies are going to go down that because of the internal combustion engine or the energy needs, that we are moving from non-renewable to renewable sources of energy. So if you have companies that manufacture scooters and there is a new company that is manufacturing traditional scooter, it might be profitable for now, it its a small company. But in the long term, the industry seems bad because a lot of move is happening to renewables.
You can take my case study here that will give you more insights. But bottom line, you must understand that both the company should be good and and and the industry should be good.
If the industry is not doing well, then most likely small cap companies are going to do poorly in that particular industry. Please keep that in mind. And if a small cap company has a lot of debt, please be on the watch out. And more importantly, this debt can be very volatile.
Sometimes small cap companies take on a lot of debt.
Questions might be, Tell me why. Why would that be the case?
I'll take your answers. Then why is it that in percentage terms, small cap companies take a lot of debt compared to large cap companies? I would want to read your answers in the comments, so do comment.
Moving on,
The company needs to be doing well. That's one. And second,
The industry needs to be doing well.
You need to keep track of debt that the company is taking and the new items, that's again, very, very important.
let us do these few things. let us just quickly take a look at the company analysis. I showed you that revenues and profits are fine. There is no massive bad stuff happening now. Here is something that is going on, right. So it is in the ASM List.
We need to understand what ASM is first and foremost a lot. I'll probably make a separate post or video on this.
This is not a bad thing OK, sometimes what happens is I'll show you an example.
There is a company called Graphite India now back in 2017, 2018, it was trading at approximately hundred dollars. And by 2018, less than 12 months, its share price became approximately a thousand. So there was massive return. Right now, whenever certain companies have these type of massive spikes or whatever reason, right NSE and BSE get suspicious, they can put them on ASM List.
This is one of the reasons or the complete reason I'll make a seperate post on ASM.
I hope you understand that getting a company put on ASM list is something that's an indication to the investors that Please be on a watch. OK, that's it. That's what it means. It does not mean that the company is bad or it'll go bankrupt. So in graphite India's case, you can see that the stock price did come down and then it has started going up.
It's not that the company went bankrupt. This is one of the key features that I love about ticker-Tape, that they tell you all these specific points and you can keep a track of news finance, everything, right if I want to read more about Manali petrochemicals, then all I need to do is that I just need to go and scan the news section and all the articles will be linked so I can follow along the news very easily.
Now, coming back to the financials. Let us look at the quarterly results as well, because that will give us an indication what the company has been recently doing.
Even the sales quarterly sales have been increasing, operating profit has been increasing. It is posting its highest ever profit before tax. The net profits have been on the rise. So overall, the company looks solid to me.
And let's just quickly check the debt to equity ratio. so, the debt to equity ratio is relatively small. I think it's fine. Not a big deal. Two percent debt for a growing company. It looks okay to me so overall, this is a solid company.
Am I buying it now? The answer is no. I will do further analysis on it. So as the first piece of analysis, I will analyze what industry is Manali petrochemicals, and the name itself suggests that it's in petrochemicals industry, so let's just quickly go through it.
what is it that it is doing right now.
Manali petrochemicals has clients across all these different domains, paints and coatings, general insulation, footwear, construction, automotive appliances, whatnot. It is everywhere. It is a raw material provider of petrochemicals to different industries.
So for a company like Manali Petrochemicals, which is in the manufacturing of petrochemicals and supplying it to other industries, essentially it becomes a type of an industry which will grow with the GDP.
Today we are sitting at sixteen thousand nifty, in the next three years, do you see Nifty reaching 20000 or do you see nifty reaching 12000? I would bet a lot of money on nifty reaching 20000 rather than 12000. So with that, the entire economy will grow. Now the economy needs raw material to grow and companies like Manali petrochemicals will supply it. That is how I am thinking and I will do further analysis on it and keep you abreast. This is one specific small cap or penny stock company that I'm looking at now.
The second keen interesting penny stock that I have picked is called as Delta Corp.
This is a screenshot of the trade that I have already made (See It in the video below). Made approximately 2,41,000 return on this investment within a few months because I was quite bullish about Delta corp.
I'll explain what it does, but this is a stock that is held even by Mr. PRUDENTJ2 JOSHUA In his portfolio. So he's betting big on delta corp as well. So this, again, seems to me like a good penny stock to consider. Now, let us very quickly take a look at what delta corp. does.
Delta corp Limited or Delta Corp is the only listed company engaged in the casino gaming industry in India. So a few days back, I was in Goa, told this story multiple times so I could see the interest that people have in going and playing games in casinos.
what is Delta Corp Trying to Do?
Is trying to create a gaming ecosystem in India. So they are running and operating casinos in Goa. They are also what they are doing is that they own this company, ADDA fifty two point five, which is an online gaming company. Now they can mix and match this offline and online gaming.
hit it really big and and if you take a look at one of their business lines, it's hospitality. They are expanding into five star, four star hotels. So as the travel industry picks up postly because of corona virus I think companies like these will grow big.
But let us quickly go through some financials, right. Because this will give you a sense, why I sold this stock if you take a look at the financials, it looks a little troublesome.
In 2018, the total revenues were six thirty seven crores. It has come down - 454 crores the company is running at a loss. But again, as I said, that this is an entirely gaming based operations. People right now just want to survive because of corona virus and hardship, they are not interested in going out, partying, taking holidays, now once the situation improves. I am quite confident that this stock will bounce. Well, I'm quite confident that this stock will bounce back. So I'm just waiting for positive news to hit, the moment it hits I'm going to invest in this. This is my analysis.
Please is not mandatory you must follow this strategy. This is just for educational purposes. Please do your own due diligence.
let us very quickly take a look at the overall stock prices as well for the last five years.
I'm quite confident that the stock should hit 345 mark. Right. And it has been climbing up. It fell massively during the pandemic. That is when I bought it and I saw it right when it came to certain height. So I'm quite confident that as the travel industry opens up, stocks like Delta Corp. are going to perform very well.
When am I going to buy this stock again?
This is the 200 day moving average. I have shown you the strategy before that. Right now it's trading at approximately 180, my assessment is that it will at least go down to 168 -169, 170 ish levels. I'm going to buy a little quantity there I'm just waiting for the stock to hit this quantity.
That is when I'm going to make massive purchases in the stock and hopefully I'm going to become an iota of Mr. PRUDENTJ2 JOSHUA And so if you like this analysis, Don't forget to share and make a comment. We will move on to the third and final stock for today.
The third company that I'm going to talk about, it is called NHPC Ltd.
NHPC Ltd. is a government owned entity and it comes in Mini Ratna, right, so the company's size is not very big as of now. And therefore penny stock , small stock. It is an Indian government, hydro powered board under the ownership of the Ministry of Power. And essentially , now this is a very important point that you need to keep in mind that from hydro power, you just assume that hey you know what we'll just build water based electricity that's it. But no later on and expanded its objective to include other sources of energy like solar, geothermal, tidal, wind etc. So this is a good energy company to consider.
Let us take a look at some of the financials.
let us take a look at how the company has grown in the past.
The stock got listed in 2008. 2009, it has been. trading in a range good thing about NHPC is that since it's a PSU, it gives a lot of dividends. Can anyone guess how much dividends this gets? So this gives approximately 16 percent dividend.
Now, do let me know in the comment if you would want me to make a post on dividends and should you be buying dividend stocks or should you be buying growth stocks?
But 16 percent dividend. It's massive. This is a very lucrative one. But you should not buy stocks for dividends. You should rather buy stocks for its growth prospects of a Titan group. So hopefully our portfolios will also grow that way. But it's a good, lucrative thing to have that if the company is paying 16 percent dividend, that is massive.
Let us just check some of the other key things.
Honestly, all the factors look fine.
let us look at the financials that has the company been growing because its a PSU and PSUs are usually laggards when it comes to growth. So good thing is, despite the pandemic, despite everything going around, the company has maintained cash flows.
Explain to me the reason why?
This is a very interesting question that I have for you, why do utility companies it's essentially a utility company,
why is their cash flow stable?
Even their dividends are going to be stable, so answer it in the comment box.
why are the cash flows for a utility company stable. So the cash flows have been stable, the profits have been stable. it seems like a very stable company now.
The stock has been trading at 26 and usually, usually has been trading in this range. This range through this range is support and resistance , if we take an overall support and resistance then I'm going to assess that it we go up to 32.45 at a certain stage.
am I going to buy the stock here? no. I'm going to wait. I will wait and monitor if it falls below because this was a great support level. So I'm going to probably buy this stock somewhere here (See it in the video below). So this is where I'm going to make the first tranche of investment and this is where I'm going to make the second tranche of investment.
I hope this point is clear that I'm going to play a support and resistance with this stock because the stock is stable. It's a utility company stock which has shown a consistent cash flow.
I don't think that is going away. And second, the dividend income from this stock is high. So if I get this stock at the right price, I will definitely be a buyer in the stock. But having said this, please consider this article and video for educational purposes only.
Conclusion:
Now, before you drop off, please read this section very carefully. This is extremely important. I'll just made three very quick points.
1. If you are looking to invest in small cap stocks, please play the economy game. Please do not assume that, hey, in a falling market, I'll identify a great company. And even if the economy tanks I'll still survive, no, small cap companies get hurt the most and in a growing economy, they grow the most. So it is a paragraph that I'll read out for you. And I've taken this from Kotak Securities website.
What makes small cap companies risky is the low probability that they will be successful over time. This makes the stocks of such companies volatile in nature. Small cap companies have a long history of underperformance, but when an economy is emerging out of a recession, small cap stocks often prove to be the outperformers right. This last line is very important that when the economy is coming out of a recession or a major crisis like coronavirus, the small cap stocks can outperform the economy. So recall the Titan example that PRUDENTJ2 JOSHUA bet on Titan, not because of the time or watches division, but because of the jewelry division of Titan, he felt that that part of the economy is going to grow and become massive.
He bet on India's GDP and India's affinity with gold and will be products. That is what gave him massive returns. So I see a similar situation being played out for something like Delta Corp.
Therefore, I'm most bullish about that stock. So if I have to put my money on one of these three stocks that I discussed, it's going to be Delta Corp.
2. Second key point that you need to know is that please revisit the fundamentals.
Please check ticker tape, follow the news section. Very, very important because the news get manipulated. I will speak from my own example.
This brings us to part three that my grandfather invested in a company called JVG , it was an old company, I was very young and he lost a lot of money on that company because these small cap stock news are manipulated.
It works like a multilevel marketing scheme. So what that means is that if Akshat speaks with the person who is Reading this. So let's call him Mr.Rahul So Akshat speaks with Rahul and tells him I bought this JVG stock for hundred and within a month it became one fifty, then he will go and speak to Saurabh and he will say ,you know what, Akshat told me this step that I also bought and now the stock price 200 what will saurabh do, he'll buy the stock.
And then this keeps on going up and up and up and it kind of a bubble gets created and it eventually pops.
This has been manipulated by news because for a time period, let's say for one year, good news will come about JVG and you know whichever company you are looking at and even media.
I don't want to say bad things about media, but a lot of things are manipulated in the media. So please do your own due diligence. The Important point is that with small cap stocks, the news is manipulated a lot. So in my case, I betting on Delta Corp Because I myself have gone to Goa, I have seen how people are crazy about playing games and casinos, and that comes from firsthand experience.
That's not media telling me I'm myself observing it. Therefore, I'm bullish about it. So please do your primary due diligence.
3. Final point is that PRUDENTJ2 JOSHUA, Mr. Warren Buffet, they are big sharks. They have a certain style of trading. They have resources. They can send people to figure it out, to do an analysis of how many people are visiting these casinos. Then they will build their valuation models.
We don't have that kind of resources. We have to be smart in terms of getting in and out of stocks. And we have to play safe , therefore keep observing news and financials for small cap investing.
