Investors are drawn to penny stocks for a variety of reasons, navigating the allure of these low-priced securities that often trade for less than N5 per share. The appeal of investing in penny stocks lies in the potential for substantial returns, albeit accompanied by higher risk and volatility.
One key factor driving investors towards penny stocks is the opportunity for significant gains. Due to their low prices, even a modest price increase can translate into a substantial percentage gain. This potential for high returns attracts risk-tolerant investors seeking to capitalize on short-term price movements.
The relative affordability of penny stocks is another factor that entices investors. With lower share prices, investors can acquire a larger quantity of shares for a relatively small investment. This affordability opens the door for investors with limited capital to build a more diversified portfolio, potentially amplifying their chances for profit.
Penny stocks often belong to small and early-stage companies, presenting investors with an opportunity to get in on the ground floor of emerging businesses. Investors seeking to identify the next big growth story may be drawn to these stocks in the hopes of securing substantial returns as the companies mature and expand.
However, it’s essential to acknowledge that penny stocks come with inherent risks. The same factors that make them attractive for potential gains—low prices and high volatility—also make them susceptible to significant losses. The companies behind penny stocks may lack the financial stability and regulatory scrutiny of more established counterparts, adding an element of uncertainty and risk.
Investors engaging in penny stock trading often conduct thorough research and analysis, aware that diligent due diligence is crucial in this volatile market. While the potential for high returns exists, it is accompanied by an equally real potential for losses. Therefore, investors in penny stocks navigate a delicate balance, weighing the allure of possible gains against the inherent risks and uncertainties that characterize this corner of the stock market.
Barring these inherent risk factors, there is a growing penchant for investment in penny stocks on the Nigeria Exchange. Some stockbrokers have argued that this is because the shares of blue chip companies are fast going beyond the means of Nigerians who are not so financially endowed but are keen to bet on gains in the stock market.
In 2023, penny stocks displayed impressive resilience and growth, with over 40 of these stocks showing year-to-date gains surpassing the current inflation rate. Notably, ten standout performers, including CHAM, JAPAULGOLD, FTNCocoa, Ikeja Hotel, OMATEK, Golden Breweries, ABC Transport, THOMASWY, SUNUAssurance, and TRIPPLEG, not only outpaced inflation but also soared with triple-digit year-to-date gains.
Penny stocks, characterized by their modest per-share value often below N5, offer an accessible entry into the market, making them an attractive option for investors. Their affordability, combined with the potential for significant returns, positions penny stocks as an enticing opportunity for individuals looking to venture into investing without a substantial upfront commitment. However, it’s essential to recognize the dual nature of penny stocks, as they are marked by high volatility, making them a blend of high-risk and high-profit instruments prone to substantial drawdowns.
Some stock analysts caution against adopting long-term buy-and-hold strategies in the penny stock sector, emphasizing the need for investors to navigate with care and consider the associated risks in their investment decisions. This caution gains particular relevance when examining the performance of the top ten penny stock performers in 2023 compared to their 2022 performance. In 2022, except for Thomas Watt Nigeria, which recorded a year-to-date gain of +169.44%, the remaining nine top performers for 2023 either remained stagnant or experienced negative year-to-date returns. Therefore, investors must discern opportune moments to capitalize on profits, given the cyclic returns often associated with these stocks.
However, it’s crucial to acknowledge the absence of guarantees in equity investments. At best, such investments may be considered inflation-protected. Against the backdrop of the current inflation rate of 28.92 per cent, these penny stocks have not only weathered the economic storm but also surpassed the rising inflation.
The stock market growth in 2023 was influenced by gains recorded in large-medium capitalized stocks, including Airtel Africa Plc, Dangote Cement Plc, MTN Nigeria Communication Plc, BUA Cement Plc, BUA Foods Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc, Geregu Power Plc, among others. Although most of these companies beat the inflation rate in 2023, their stock prices significantly appreciated, making it challenging for prospective investors to buy or increase their holdings in some of these companies.
For example, the stock price of Airtel Africa closed in 2023 at N1,887.00 per share, gaining 15.4 cent from N 1,635.00 per share it opened for trading. An investor with N50,000 can only buy an estimated 26.5 units of Airtel when the price was trading at N1,887.00 per share as of December 29, 2023. The current price of Airtel Africa as of January 10, 2024, has increased to N2,000, meaning investors with N50,000 can only buy an estimated 25 units of the telecommunication company aside from commissions.
Also, trading at N282.00 and N44.00 per share as of January 10, 2024, investors with N50,000 can only buy 177.30 and 1,136.36 units of MTN Nigeria Communication and Guaranty Trust Holding Company, respectively, excluding commissions.
The stock market momentum has instilled optimism for a potentially bullish market in 2024, fueled by the NGX All-Share index crossing 83,000 basis points. With the quantum of holding small units, some percentage of retail investors have opted to take a position in some penny stocks as another means to invest in listed small-capitalized stocks quoted on the Exchange.
An economist, Dr. Paul Okorie, said, “By understanding promising sectors, conducting diligent research, and employing prudent risk management strategies, investors can navigate the exciting opportunities that lie ahead. Some of these penny stocks appreciated by over 700 per cent in 2023, and before now, these companies’ average price were hovering around N5-10 per share on the Exchange,” he said.
Interestingly, most of these companies over the years have failed in dividend payout to investors. However, analysts believe that these penny stocks can provide good returns on investment due to their potential for share price appreciation in the medium term.
Investors, who invested in Transcorp Hotels Plc, Chams Holding Company Plc, and CWG Plc, among others, witnessed stock price appreciation in 2023, with price gains ranging from 721.8 per cent to 1022.9 per cent. These companies emerged as best-performing stocks in 2023 as investor demand soared.
For instance, Transcorp Hotels posted the highest capital appreciation as the share price jumped from N6.25 in 2022 to close at N70.18 on the last trading day of 2023, marking an increase of 1022.9 per cent. Transcorp Hotels is the hospitality subsidiary of Transnational Corporation of Nigeria (TRANSCORP). Its market capitalization rose to N718.8 billion on the last trading day of 2023. With a share price appreciation of 1022.9 per cent, Transcorp Hotels emerged as the best-performing stock on the NGX in 2023.
Chams Holdings sustained its stellar performance in 2023 as the frontline financial technology company’s share price rose by 795.5 per cent from N0.24 at the beginning of 2023 to close at N1.97. Chams HoldCo migrated from a loss of N135.81 million in the third quarter ended September 30, 2022, to N255.1 million in the third quarter of 2023.
Other companies that made the league of the top 10 were: Transnational Corporation of Nigeria (TRANSCORP) 676.4 per cent; MRS Oil Plc, 644.7 per cent; Northern Nigeria Floor Mills Plc, 639.8 per cent; Japaul Gold and Ventures, 507.1 per cent; Ikeja Hotels, 571.4 per cent; FTN Cocoa Processing, 410.3 per cent, and Infinity Trust Mortgage Bank, 372.44 per cent.
The Chief Executive Officer of Axel Capital, Wale Adu, noted that investors tend to rotate out of overvalued stocks nearing their peaks and seek opportunities in sectors with relatively lower prices as the stock market continues to appreciate.
According to him, when the market is positive, the tendency is for investors to move from stocks where their prices are very high-almost reaching their peak to other sectors where the prices of stocks are still relatively low and take a position.
Another stockbroker, Tunji Adepoju, told NATIONAL ECONOMY that it is natural for players in the Exchange who want to participate actively to look for cheaper investment outlets. He stated that although it is riskier, new companies do have the potential to scale, and when they do, investors can reap bountifully.
As the curtains closed on 2023, the Nigerian Exchange Limited (NGX) witnessed a positive trend, instilling optimism among investors for a potentially bullish 2024, with the equities index inching closer to the 80,000-point milestone.
In an exclusive conversation with NATIONAL ECONOMY, seasoned investment analysts have identified specific penny stocks, offering a potential avenue for discerning investors seeking capital appreciation. The key recommendations come with a caveat: a call for caution, comprehensive research, and diligent risk management.
Experts stressed the importance of focusing on penny stocks characterised by robust fundamentals and a consistent history of dividend payments. Among the highlighted options are Sterling Bank, FCMB, Wapic Insurance, Jaiz Bank, AIICO, FTN Cocoa, Chams, Japaul Gold, Universal Insurance, Royal Exchange, and Verita Kapital. Analysts foresee these stocks holding promise for medium-term share price appreciation, presenting favorable returns on investment.
Managing director of Crane Securities Limited, Mr Mike Eze, drew parallels to market dynamics from two decades ago, emphasising that during bullish phases, investors tend to transition from overvalued stocks nearing their peaks to sectors with lower-priced stocks. He noted that astute investors often gravitate towards penny stocks, citing their historical potential for significant price surges, even without strong fundamentals.
He stressed the need for meticulous analysis and urged investors to prioritise due diligence. Investment decisions should be grounded in identifying penny stocks with robust underlying fundamentals and growth potential.
Eze recommended considering stocks like AIICO Insurance, AXA-Mansard, Jaiz Bank, and Chams, viewing them as potential stars in 2024. He highlighted that despite the regulated environment providing a degree of capital protection, no investment is without risks.
But analyst and head of Research at FSL Securities Limited, Victor Chiazor,argued that the prevailing trend is expected to see a shift towards investments in penny stocks, with notable considerations including Sterling Bank, FCMB, and Wapic Insurance.
Chiazor anticipated that the equities market in 2024 will be influenced by both company performance and the implementation of pro-market policies.
For Kasimu Garba Kurfi, Managing Director/CEO at APT Securities and Funds Limited,
“The current market development suggests that penny stocks are where to go in 2024 for investors to smile at the banks because it offers good returns on investments.”
Kurfi shared insights into the potential significance of penny stocks and small-cap investments in 2024. He cautioned against the sustained bull run in the banking sector, pointing to the potential impact of capitalisation needs set by the Central Bank of Nigeria (CBN).
Kurfi recommended considering options like AIICO, FTN Cocoa, Chams, Japaul Gold, Universal Insurance, Royal Exchange, and Verita Kapital, urging investors to meticulously evaluate these opportunities.
But the executive vice chairman of Hicap Securities Limited, David Adonri, acknowledged the current sustained bull run across the market, making the identification of penny stocks with solid fundamentals a challenging task.
Adonri emphasised that investors prioritising the safety, liquidity, and profitability of their investments can achieve diverse objectives through stocks, irrespective of their capitalisation status.
The investment experts advocated for a cautious approach towards penny stocks in 2024. The recurring theme centers around thorough research, careful analysis, and adopting a long-term perspective to navigate the dynamic market landscape and potentially unlock significant returns on investment.
