Writer is an investor for more than 25 years with more than 600% profit from all invested stocks. Here, I am revealing a personal secret using to identify the best penny stocks to get incomparable profits.
Caution: Penny stock investments bear high risk. Right selection and investing is mandatory or will land to huge loss.
Learn if you want. Or just ignore. I don't care. You will never get such detailed, crispy information anywhere on the subject. It is a secret !
People, especially those are new to the market or do not have any experience, generally like to invest in penny stocks. If you are a member of any groups or forums focusing to investing in stocks, you can find lots of people inquiring about penny stocks than the best other stocks available in the market. What is the intentions or mindset leading them to running behind penny stocks?
One of the frequent identified mindset is the penny stocks are relatively low prices and can acquire huge number of shares by paying low price. People thinking that a penny stock with a price of 1 penny may double soon and this their invested money too. It is ultimately a bad thought! It will not happen most of the time but the entire money may in risk of loss. how? Here you go:
Penny stocks are notorious with liquidity. Also, they are from the companies that is generally operating in the capital intensive commodity business where the growth opportunities are very less. They also have huge debt against equity that drag them back from people buying frequently this the liquidity may formed.
Even though, there are best penny stock based on the history that, most of the well performing large cap and blur chip stocks were penny stocks once! By keeping this fact in mind, investors required to identify the right penny stocks with huge growth potentials. But how?
Here is my personal method to identify and invest in excellent penny stocks, gave enormous wealth over the period of time. Here you go:
Remember, in the world of investing and stock market, commonsense plays major role than any higher qualification on finance or mathematics. In my opinion, a true investor first should have enough commonsense to understand things from all the angles. Here you can find how I do analysis on any penny stocks with some magic mix of parameters:
1. The Secret of Business Established Year + Current Price + Face Value Connections - The First Secret
The first place to look is the established year. Secondly, current price and third is the Face Value of the stocks. Connect these three together. For example, if I find a penny stock with Rs. 3 per share along with a face value of 10 and the business established year is 1995. The first question from my mind is, why the price is too low for this stock even after it is operating in the market for more than 29 years? If it has a Face Value of 10 then that would add more weight to this doubt. How we can select such companies?
If the company still running with the share price of Rs. 3 even after this much long time, remember the business is a waste. In the other side, if the face value is 1 then the investor can make this formula, Current price X 10 = 30. Only Rs. 30 is the share price after 29 year? Unbelievable!
No much thinking is required to leave any investing decision to such stocks.
2. The Magical Analysis of Sales + Expense + Operating Income - The Second Secret
Second method is the Sales/Expense ration and the Operating Proft as its result. Think like this, if a company has 32 crore Sales and its Expense is 31.5 Crores, imaging the Operating income would be only 0.5 crores! After its other expenses, interests, tax etc., do you think the business would have any money as its net profit? Never!
If you find any company with Sales and Cost of Goods sold is very near or equal or sometime the COGS is more than Sales, immediately move away from that company.
3. Using Promoter Holding % as a Secret Weapon - The Third Secret
If the above 2 points are comfortable, then it is the time to have a look into the promoter share with the company. Remember, having promoter share more than 55 to 65% is a good sign showing promoters have trust on the company and its business. If the promoter share isi less than 25%, remember even the promoters are not having trust to the company then why we?
4. Debt+Net Profit+Reserves Relationship Magic - The Fourth Secret
Fourth parameter to look into is the connection between current debt with its net profit. Generally a company with D/E less than 0.5 is a best option. If any penny that you are analyzing have a debt that is more than that year net profit, ensure you are just running away from that company.
Have a look into the reserve. If the reserve is more than two times of the original debt a business has, then there would be sufficient room for the business to tackle debts in future. However, as told, any company that have debt more than yearly net profit is a very bad sign.
5. ROE + ROCE + FCF + EPS Connection Magic - The Fifth Secret
Specifically look for the company that have and ROE > 15%, ROCE > 15%, Free Cash Flow (FCF) > 15% and the EPS > 15%. This formula would help you to identify the investors benefits from the company. Ensure you are looking for this in an yearly, 5 yearly and TTM (Trialing to Twelve Months) basis.
Never ever invest into any company that is showing negative FCF. It is equally important that the company should have growing ROE, ROCE and EPS Y-oY and any negative numbers in any of these three is a dangerous sign for investors!
6. Bring Commonsense Aboard. I Found Most Proclaimed Investors Lacking This Must have Quality!
If anyone ask on what is the the most required quality of an investor, I can easily say, "Commonsense". Any investor, who are not sufficient enough to do a deep analysis on anything he or she hear or see and from all four angles, I can easily say, he or she cannot be a good investor at any cost.
Final thoughts:
Above mentioned are the core 5 points I use to analyse a stock. Interestingly, it would take time to identify best penny stocks. I generally not prefer any penny business that established earlier than the year of 2011. If so, generally it could be a high capital intensive commodity business. In the fast changing world of technology, any business that utilizing the potential of technology is worthy. Best businesses are frequently changing their business as technology driven by utilizing the latest technologies.
This would be my advice to readers that, creating a personal investment framework by adding the above points and that would help you to compare the ratios well with any stock that you have identified and interested to have an analyse. Start with this framework as your first step for the same and achieve huge success by identifying and investing in the best penny stocks!
Let me know if you have any doubts or questions, once if you have. You can comment below for my reply..
