Penny stocks can provide high returns even with only a small price movement.
Penny stocks have become the favorites of many retail individuals, especially first-time investors.
Since there are some cases where penny stocks have gone up 1,000% in just a few months, investors are often attracted by the big gains.
Make no mistake, because of their low prices, these stocks can offer high returns even with only a small price movement.
And the ability to buy a substantial amount of stock with a smaller investment has some appeal to retail individuals.
Over the past few months, we’ve covered penny stocks should be on your watch list. These stocks have good balance sheets, low or zero debt, and a track record of paying dividends.
But what about things to avoid?
In this article, we look at penny stocks that you should avoid at all costs.
#1 Indian Scooter
The first coin stock to avoid on our list is an Indian two-thirds scooter company Scooters.
Scooters India is primarily engaged in the business of manufacturing and selling motor vehicles and spare parts.
So why is this company on the list of penny stocks to avoid? Take a look at the company’s financial statements and you’ll see why.
Just as the company’s revenue was accelerating, the pandemic took its toll on the company’s financial health.
While the financial year 2021 is the worst year in terms of financial performance for Scooters India, the company has nothing to show even if we look at its historical financial statements.
Sales have been steadily declining over the years while it shows nothing on the profit front. From fiscal year 2007 to fiscal year 2021, the company reported cash profits only three times (2014, 2015, 2016).
For fiscal year 2022, the company expects a loss as it has reported consecutive losses for the past three quarters.
While the company has performed well on the leverage front, its current debt-to-equity ratio of 113 is definitely a no-brainer as to why this stock should be avoided.
The company, heavily indebted, reported negative free cash flow and negative ROE.
Unsurprisingly, the company’s stock is still trading near where it was three years ago.
Scooters India also has no history of paying dividends at least once.
What makes our case more interesting is the data we found about stock ownership patterns. It is assumed that low-transferable shares tend to tend to rise due to the limited availability of shares.
Scooters India’s equity model shows that almost 94% of the shares are held by company promoters, leaving very little for investors. But given the lack of interest from retail investors and despite the company’s low free-to-transfer ratio, the stock remains in a tight range.
#2 Peninsula Land
Next on our list we have a real estate company – Peninsula Land.
Peninsula Land is a general real estate company. It is part of the Ashok Primal Group and is engaged in the development of retail and commercial projects
projects and residential complexes.
The company is known for developing India’s first shopping mall, Crossroads, in South Mumbai and converting its first factory site into a commercial complex, Peninsula Enterprise Park, in Mumbai Central Business District, Lower Parel.
Take a look at the table below and you’ll understand why we’re saying avoid this stock.
Even though the company has a decent (but not great) sales record, profitability is still an issue, and that’s been the case for the past seven years as well.
The company has reported a consolidated net loss for the past few quarters.
And as you’d expect, the company hasn’t had a record of paying dividends over the past five years either.
Negative free cash flow, negative ROE and ROA – the company does not benefit from any of these metrics.
Meanwhile, Peninsula Land is also burdened with heavy debt. Its current debt-to-equity ratio is a whopping 230!
On a consolidated basis, the company’s debt level stood at Rs 2,310 crore as of July 2019, including project-level debt, and since then the company has managed to keep it down.
Just one month ago, the company defaulted on debt totaling Rs 772.4 million. And this is not the first case. Peninsula Land had previously defaulted on its debt in 2020.
Even so, Peninsula Land’s stock still rallied well over the 1-year and 3-year periods.
#3 Autoline Industries
Autoline Industries is engaged in the production of sheet metal components, assemblies and sub-assemblies, foot control modules, parking brakes, hinges, etc. for major OEMs in the automotive industry.
This is the main supplier for Tata Motors with nearly 80% of revenue coming from the Tata group company.
Since Autoline Industries reported its first annual consolidated loss in March 2014, the company has never recovered and has suffered consecutive losses.
Sales have also fallen over the past three years.
After fiscal year 2013, the company has not paid dividends to shareholders.
Furthermore, there is a delay in repaying a debt with one of the company’s lenders due to a tight liquidity situation. The current debt-to-equity ratio stands at 9.4, much higher than in previous years.
Now this is where it gets interesting. Ace investors Rakesh Jhunjhunwala holds a 2.5% stake in the company as of December 2021. Meanwhile, his wife Rekha Jhunjhunwala also holds a 1.8% stake.
In the past year, shares of Autoline Industries have risen 120%, despite leverage and profitability issues. Maybe just because Rakesh Jhunjhunwala is an investor in the company? Probably.
#4 McNally Bharat Engineering
McNally Bharat is one of the established engineering companies in India, founded in July 1961 under the name McNally Bird Engg. Have. Ltd as a joint venture between McNally Pittsburg, USA and Bird & Co.
The company, headquartered in Kolkata, specializes in providing turnkey solutions in the areas of Electrical, Steel, Alumina, Material Handling, Mineral Benefit, Coal Washing, Ash Handling and more . It also has many subsidiaries and affiliated companies, both in India and abroad.
Although McNally is a well-known company in its industry, why would we recommend avoiding this stock? For many reasons…
For starters, the company’s revenue has dropped quite a bit over the past five years. And because of this, McNally is reporting heavy losses.
This year, the industrial downturn coupled with bank restrictions on liquidity management has adversely impacted McNally’s business and profitability.
The company’s record of consecutive losses began in March 2013 and since then the numbers have only increased.
It took on more debt, increasing its debt-to-equity ratio.
With a history of not paying a dividend for the past eight years, mounting debt, consistently falling sales, and negative earnings, McNally Bharat is definitely a stock to avoid.
The company is expecting debt restructuring plans to be written off this financial year. Management said they are having an overall debt restructuring strategy by seeking cooperation from financially sound investors and businessmen.
McNally Bharat owes more than Rs 23 billion to a wide range of banks including Bank of India, SBI, IDBI Bank, Axis Bank, ICICI, Karur Vysya, PNB, Standard Chartered, Union Bank, UCO Bank, Bank of Baroda, Canara Bank, DCB Bank and DBS Bank.
In the future, the company is pursuing joint ventures in Europe and the Middle East to actively implement projects in the fields of smart cities, social sector buildings, renewable energy, water management and infrastructure.
What other penny stocks should you avoid?
In addition to the above, here are some other penny stocks that you should avoid. These companies have a track record of reporting ongoing losses, declining sales, and debt burdens.
Instead, look for companies that have a good track record in profits and sales, have a debt-to-equity ratio of less than 1, and pay dividends.
Lucky for you, we’ve put together a curated list of the hottest penny stocks, with the help of Equitymaster’s Stock Screener.
Check out the screening tool below that lists the most promising potential penny stocks.
Please note that these parameters can be changed according to your selection criteria.
This will help you identify and weed out stocks that don’t meet your requirements and emphasize stocks with good indexes.
Equitymaster’s Penny Stock Expert on Stocks to Avoid…
We reached out to Rahul Shah, Co-Head of Research at Equitymaster and editor of Exponential Profits, about what he had to say about penny stocks to avoid.
This is him in his own words…
Graham once mentioned that the main damage to investors comes from buying low-quality securities at times when business conditions are favorable.
A lot of poor quality penny stocks can have a year or two where they make good returns.
Investors should not confuse this prosperity with safety and end up buying stocks.
They should always stick with stocks that have at least 5 years of tracking steady returns or growth or both and also have a good balance sheet. Otherwise, the risk of losing money in the penny stock space is very high.
Before investing in a penny stock, one must check if the company has a good balance sheet. A healthy financial record suggests good growth prospects.
Next, check for future growth opportunities. Favorable government policies or good order book status are some of the indicators you can consider.
Finally, check the viability of the business. The more viable the business, the longer it will last.
Invest in penny stocks Not rocket science. However, it requires you to practice caution while doing so. Choosing the right penny stocks will help increase your portfolio returns.
Happy investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is provided from Equitymaster.com)
(This story has not been edited by NDTV staff and was automatically generated from the feed provided.)
