Penny stocks see money as large-caps tumble

Strategic investors may have shown hunger for valued penny stocks following recent disappointment in the prices of large-cap stocks, which spurred over N400 billion in losses from the stock market last week.

Penny stocks, also known as cent stocks in some market jurisdictions, are common shares of listed companies that trade at low prices per share.

Research and investment analysts believe that most of these stocks have recently outperformed the broad market index and heavyweight stocks.

“The 2014 first-half earnings season just ended and the market generally was not impressed by the set of earnings result from the heavyweights while few stocks that are considered as low caps were able to deliver good results,” said Abiodun Keripe, research analyst at Elixir Investment Partners Limited, a Lagos-based investment company.

“From a year-to-date basis, stocks like Premier Breweries, IHS, NPF Microfinance Bank have delivered returns in excess of 25 percent, clearly outperforming the broad market index and heavyweights such as Dangote Cement, Nigerian Breweries and Guaranty Trust Bank plc,” Keripe said.  

As money flowed into penny stocks, the analyst observed that the stock market appeared to have followed historical trends where equity buyers switch their stock-buying appetite to relatively low-capitalisation stocks as large caps underperformed.

Kayode Omosebi, research analyst at UBA Capital plc, while responding to BusinessDay enquiry, said strategic investors were identifying the value in some of these companies and looking at taking some strategic moves.

“Stocks like Premier Breweries plc, Ikeja Hotel plc, and Royal Exchange plc returned 37.5 percent, 6.8 percent and 5.3 percent, respectively, in last week’s trading amidst poor performances by large-cap stocks,” Omosebi said.

“Some of these penny stocks, especially the insurance counters and few in consumer goods sector, still portend values and we might see investors taking position for a long-term horizon,” he said.

He, however, warned investors to be careful when investing in penny stocks, adding, “One needs to critically look into the fundamentals of the firm coupled with corporate governance and conformity to regulatory requirements. Liquidity also remains a major issue here.”

In his view on the risks, Keripe said while performance of penny stocks was always highly skewed relative to the broad market because factors moving this class of stocks were beyond earnings and fundamentals, “one thing is clear about investing in penny stocks: lack of liquidity and limited disclosure are risks that investors must consider appropriately”.

“Investors can get value from penny stocks. However, adequate consideration must be given to the liquidity and inadequate disclose risks,” he added.

In the case of many penny stocks, low market price inevitably leads to low market capitalisation. Analysts say these are stocks that generally might be considered to be highly speculative and high risk because of their lack of liquidity, small capitalisation and limited disclosure.

While sell pressure on most large-cap stocks impacted negatively on the Nigerian bourse last week, a look at the performance of some penny stocks in same period (August 8-15) shows that share price of Costain (West Africa) plc rose from N1.15 to N1.20.

Also, Japaul Oil & Maritime Services plc’s share price grew from a price of N0.52 to N0.53. Royal Exchange plc rose from N0.57 to N0.60. Ikeja Hotels plc also appreciated from N0.74 to N0.79. Neimeth International Pharmaceuticals plc rose from N1.08 to N1.12. Premier Breweries plc rallied from N0.80 to N1.10, while NPF Microfinance Bank closed flat at N1.

In the one-week period, the NSE All Share Index (ASI) declined by 2.86 percent to 41,380.05 points, from the week-open level of 42,598.46 point; while the year-to-date (YtD) return stood lower at 0.12 percent.

Some other penny stocks at the Nigerian Stock Exchange are Multi-Trex Integrated Foods plc, Unity Bank plc, Wema Bank plc, Royal Exchange plc, Courteville Business Solutions plc, Chams plc, Multiverse plc, RT Briscoe, C&I Leasing plc, Ikeja Hotels plc, Associated Bus Company plc, and Anino International plc.

The bulk of the penny stocks are in the insurance carriers, brokers and services subsector of the NSE. They include AIICO Insurance plc, Continental Reinsurance plc, Cornerstone Insurance Company plc, Guinea Insurance plc, International Energy Insurance Company plc, Law Union and Rock Insurance Company plc, Linkage Assurance plc, Mutual Benefits Assurance plc, Niger Insurance Company plc, Prestige Assurance Company plc, Regency Alliance Insurance Company plc, Standard Trust Assurance plc, Standard Alliance Insurance plc, Unic Insurance plc, and WAPIC Insurance plc.

Others NPF Microfinance Bank plc, Resort Savings & Loans plc, Union Homes Savings & Loans plc, A.G Leventis Nigeria plc, Vono products plc, among others.

Iheanyi  Nwachukwu