Even as stock markets struggled with major disruptions due to the covid-19-led lockdown, 25 penny stocks have become multi-baggers, surging 100-1,240% in the last six months. During the same period, benchmark Sensex slipped 14%, while the BSE midcap and BSE smallcap indices were down 11.42% and 7.8%, respectively.
According to a Mint analysis, 161 penny stocks have given positive returns, while 56 stocks slipped in the January-June period. Hathway Bhawani Cabletel and Datacom Ltd saw a whopping 1,240% rise in its stock price from ₹3 to ₹40.2 apiece. Besides, Opto Circuits (India) Ltd surged 392.71%, Andhra Cements Ltd soared 331.16% and JMT Auto Ltd jumped 310.61% in the last six months. For the analysis, stocks with market cap of less than ₹1,000 crore and stock value of ₹10 were considered.
Penny stocks are illiquid stocks, which are highly volatile and are considered risky bets. “Typically, few far-sighted investors buy these penny stocks, creating an euphoria around them, attracting new small-time investors with their low value and promise of high returns," said an analyst at a retail brokerage, requesting anonymity.
According to analysts, bargain hunting, or the bottom-picking strategy by new market participants led to gains in these penny stocks.
Though the broader markets were far from reaching their January levels, few penny stocks were at multi-year highs. Bottom fishing refers to investing in assets that had declined due to intrinsic or extrinsic factors, and were considered undervalued. Bottom fishing is an investment strategy wherein investors buy stocks whose prices had recently dropped and were considered undervalued.
According to Amar Ambani, senior president and Institutional Research Head, Yes Securities, one reason for the penny stocks to rise is abundant liquidity chasing all kinds of stocks.
The fear-of-missing-out phenomenon among new investors in stock markets often chase such low-value stocks, he said. “However, the stocks are also first to fall when there is any unfavourable news in the markets. The stocks have fallen so hard earlier and are so low in value that upticks in a few stocks optically looks robust."
Ambani said penny stocks are mostly operator-driven and fall prey to speculative trade, hence, they involve high risks.
But, this is not a India-only phenomenon. Hertz, the second-largest car rental agency in the US, had filed for bankruptcy in May, but its stock rose from $1.11 to $2.38, up 114% within 24 hours, mostly led by traders on Robinhood, a mobile brokerage. To be sure, while some penny stocks turned multibaggers, several also moved in the opposite direction.
Around 49 stocks turned penny stocks in the last six months, losing as much as 90%. Darjeeling Ropeway Co. Ltd fell from ₹52.4 in January to ₹5.21 in June, losing 90%. Others such as Terrascope Ventures Ltd (down 80.88%) and Novateor Research Laboratories (down 79.59%) are the new penny stocks.