Penny Stocks to Hold for the Long Term
Specifically, it was about penny stocks to hold beyond 2022.
In case you missed the screening process, here it is again…
- Avoid all penny stocks with a leverage ratio of 0.5 or greater
- Avoid All Losing Penny Stocks
- Avoid all penny stocks with negative cash flow from operations
- Avoid all penny stocks with pledged shares. The promoter’s commitment must be zero
- Avoid all penny stocks with a promoter holding less than 50%
- Avoid all penny stocks that don’t pay dividends
Use these filters on stocks priced below ₹100 per share and a market cap of less than ₹10 billion. These are the 2 general rules of thumb for classifying penny stocks.
You will get a first filtered list of penny stocks.
From this list, you should focus only on the sectors that you think you can understand. For example, if you think the pharmaceutical industry is too complicated for you, remove all pharmaceutical stocks from your list.
You now have a curated and personalized selection of penny stocks. Now you can dig into this list to choose the best penny stocks to buy and hold beyond 2022.
You will do this by applying the following fundamental filters…
- Sales and profit growth over the last 10 years above 10%
- Cash greater than total debt
- Current ratio greater than 1. Ideally greater than 2
- Return on equity greater than 12%
This step-by-step process will get you started in your search for the best penny stocks to buy and hold beyond 2022.
If you diligently followed this process, you will end up with a concise list of penny stocks.
Then you need to do some due diligence on these companies. While doing this, make sure to pay close attention to promoters. Check for governance and corporate integrity issues.
After doing your due diligence, if you don’t find any issues, you can go ahead and invest in these stocks.
Make sure you don’t pay for an expensive appraisal. Generally, a PE ratio of less than 20 is acceptable.
But then what? Can you hold these stocks for the long term? Or will you have to resell them after a few years? What if those stocks skyrocket in a few months? What if they crash?
There are no easy answers to these questions. In this article, we’ll look at the process you can follow if your goal is to build long-term wealth with penny stocks.
Embrace the uncertainty
The most important thing about owning penny stocks for the long term is embracing uncertainty.
You see, big companies offer a certain degree of certainty to investors. Large companies are generally stable. They have built this stability over years and decades.
In these companies, most of what happens in one quarter will not change in the next quarter. Internal systems and key employees will keep the business running. This will be true in good and bad times.
Investors generally don’t care about these systems. As long as the company generates growth, it will keep its shares.
This is not the case with small businesses. And most penny stocks are small businesses. Their numbers for sales, profits, assets, cash flow are all miniscule.
Long-term investors will only consider investing there if they believe these numbers will increase significantly over time.
But that’s just the problem. To increase sales, profits, assets and cash flow, a small business must first develop reliable internal systems. They also need strong leadership and management teams.
It doesn’t happen overnight. It takes a long time to build these systems and acquire critical skills.
And even if a small business implements them, it is vulnerable to many shocks…
A large customer can cancel a large order. A critical supplier may require an amendment to the supply contract. Factory workers could go on strike. The government could require the issuance of a plant closure notice for environmental reasons.
There are many more. All of these issues can cause a serious stock crash.
But big companies can handle these problems. After all, they have manipulated them in the past.
They have contingency plans. They have key people in place to respond quickly. They have backup staff and vendors. They diversified their sales so losing a customer wouldn’t hurt too much.
And the market knows it.
That’s why a lot of bad news doesn’t have too much of an impact on large cap stock prices. They may drop for a day or too much, but then those stocks recover.
It is the opposite in the case of penny stocks.
If you hold penny stocks for the long term, be prepared for enormous volatility in the stock price.
Closely follow the movements of the direction
In large companies, systems guide people. In small businesses, people build systems.
Leadership and management are much more important for a small business than for a large business. Even small decisions can have a significant impact.
That’s why you have to carefully follow every movement of the steering. If you think he made or will make a bad move, you should re-evaluate your position.
It’s not worth holding onto a penny stock when management does something stupid or unethical. As soon as the market takes notice, the title will collapse.
On the other hand, if your penny stock turns into a huge multibagger over the yearsmanagement will be almost solely responsible for this.
They can make or break the business. So follow their every move. Read everything they say in the media. Attend any investor meeting organized by the company. Attend the AGM and ask detailed, prepared questions.
When it comes to penny stocks, every piece of information is important.
Check the financial statements regularly
Once every 6 months, review the financial statements again with a fresh perspective. You will surely learn something new.
Now, 6 months is usually not long enough to see big fundamental changes in a business. But it is an important exercise for penny stock investors. It will keep you informed of the latest developments.
You may notice a small but important change in the balance sheet. Something is wrong with the cash flow statement. A new item may have appeared in the income statement.
Take it all. You might realize something important that you didn’t know when you first invested in the penny stock.
Patience is the key
Rome was not built in a day. And neither do multibaggers.
It’s ironic that most people who invest in penny stocks do so with the expectation of quick profits when they can multiply their investment over the long term.
Penny stocks are your best bet in the market if you’re looking to build life-changing wealth. But the process takes time.
Over a period of 10 years, the share price of Balkrishna Industries has increased 30 times. In 2011, it was a penny stock that traded at approximately ₹90. In 2021, the title reached ₹2,700.
This is just one example among many in the Indian stock market. But the question is: how many investors have held the stock during these 10 years?
That’s what you’ll need to do as a long-term penny stock investor. Be prepared to hold the stock for 10 years or more.
If you’ve done everything mentioned in this article, your patience will likely be rewarded with life-changing feedback.
Good investment in penny stock!
Warning: This article is for information only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from equitymaster.com