The purpose of this article is to emphasize the need for stock analysis while researching penny stocks. In the year 2020, I got an opportunity to buy a quality penny stock trading below Rs.25 levels. The company is from the engineering sector. Today the price of that stock is nearing Rs.100. This rise in price is supported by growth in its business fundamentals like intrinsic value, revenue, profit, EPS, etc. For quick answers about penny stocks, read the FAQs
Introduction: Finding Good Penny Stocks
[Penny stocks list] One Sunday afternoon, I met one of my friends for lunch. He is new but an enthusiastic stock investor. He likes low-priced penny stocks. He is that Gujju who has that uncanny knack for picking stocks at the right times. He does it time and again. As a result, he has also upped his confidence.
In markets like these (post-COVID), where the general tendency of the price is to go up, overconfidence may be risky. Maybe not now, but this mindset may lead to losses in a normal market scenario. I had a nice chat with him about how he picks his penny stocks. Not surprisingly, apart from the few financial ratios he mentioned, his study lacked fundamental analysis.
What he was doing was trading. This is not bad. But it becomes a problem when one thinks he is investing fundamentally, but in reality, he is trading. This is common, generally, only day traders get attracted to penny stocks. But there is space for investors as well. Remember, even Apple Inc, Google, and Microsoft were penny stocks once.
List of quality penny stocks in India
(Updated on 06-May-2023)
|SL||Company||Price||Market Cap||ROCE (5Y)||EPSG (5Y)||P/E||GMR Score|
How did my friend screen the penny stocks?
He shared with me his stock screening criteria. He told me that he refers BSE 500 index. In this list, he screens those stocks which have a low price (like below Rs.50).
He then checks their fundamentals in moneycontrol.
He had some 10-15 parameters based on which he checks if his screened stocks are worth a buy or not.
More often than not he is able to pick reasonably good stock this way.
[P.Note: I also have my stock analysis worksheet which I use to check the business fundamentals of my stocks. It analyses a stock in less than 15 minutes.]
Why I wrote this post…
It was after meeting my friend that I got a clue to re-writing this blog post altogether. Why?
Because I could see its requirement.
I thought that it will be nice if I can explain my understanding of ‘low-price penny stock‘ to my readers.
It will make sense to a lot of people (like my friend).
So let’s start from the very basics…
What are Penny Stocks?
Penny stocks are mainly characterized by their low market price (below Rs.50 per share). But this is not the only criterion. These stocks are also distinguished by their low market capitalization.
Penny stocks are necessary for a “small cap” in nature. Hence they will never appear in a stock index like “S&P BSE 500”.
The fallacy of my friend…
My friend probably did not want to buy penny stocks. Probably this is why he was referring to BSE 500 Index.
But why he was picking only ‘low-price’ stocks from the list? I feel this is due to a misleading assumption. What is the assumption?
Wrong assumption: Stocks of BSE 500 Index has decent fundamentals. Any stock in BSE 500 index, which is trading at low price, must be undervalued.
In some cases, this may be true, but in most cases, it will not point toward the right stocks.
Moreover, by shortlisting only low-price stocks, my friend is actually missing out on other stocks that though have high market prices, and may still be undervalued.
What my friend must do?
Instead of focusing only on BSE-500 stocks, it is necessary to look beyond. Why? Because by concentrating only on the top 500 stocks, he is actually missing a huge opportunity. How?
There are about 3,800+ Stocks listed on National Stock Exchange (NSE). In BSE this number is 5,000+ nos.
If we are concentrating only on the Top 500 Stocks (like BSE 500 Index), we are actually covering only 13.2% of stocks of the total market.
Most of the investors buy/sell within these Top 500 stocks. Hence there are more chances of finding these stocks at overvalued price levels.
The other 86.8% of stocks (beyond BSE 500) are less traded. Hence offer both high risk and high opportunity.
- Why Risk: Because there are chances that the fundamentals of these stocks may be weak.
- Why Opportunity: Because if the business is good, it is here that its stocks are more likely to trade at undervalued levels (more than in BSE 500 index).
Defining Low Price
No matter how low is the price, if the underlying company is bad, such shares are worth avoiding. Let’s understand this with an example.
Example: A stock that is trading at Rs.100 can be cheaper than a stock trading at Rs 10. How?
Suppose there are two stocks A & B trading in the stock market.
- Market price: “A’s” price is Rs.100 and that of B is Rs.10.
- Earning Per Share (EPS): “A” has an EPS of Rs.10 per share. Similarly “B” has an EPS of Rs.0.5 per share.
- EPS Growth: “A” displays an EPS growth in the last 5 years as 12% p.a. Similarly “B” has EPS growth in the last 5 years as 11% p.a.
Based on the above data, the stocks “A” & “B” are displaying the following price multiples:
- Price Earning Ratio (P/E): A’s PE ratio is 10 (100/10), and that of B is 20 (10/0.5). This way Stock A looks undervalued.
- PEG Ratio: A’s PEG ratio is 0.84 (10/12), and that of B is 1.81 (20/11). Here as well, A looks undervalued. Read more about PE and PEG ratios here.
Even though the market price of A is higher than B, but it is still a better buy than B. Why? Because it price multiples suggest that.
Filters for Penny Stocks
- #1. Filter: Low market price.
- #2. Filter: Strong underlying Business.
- #3. Filter: Undervalued price.
Why first attention is on “low market price”? Because the high price of stocks makes them unreachable for common men. Let’s see examples of a few high price shares:
- MRF Ltd: Rs.64,800 per share.
- Page Industries: Rs.29,600 per share.
- Eicher Motors: Rs.21,400 per share.
These are stocks of great business, right? But even if they are trading at undervalued price levels, still a common man may not be able to buy even one share of them.
Why it is so? Because of their high current market price.
So where does this understanding lead us to? The lower will be the market price of stocks, common men will like more (like penny stocks)
Now we are ready to know ‘how to evaluate the underlying business’ of penny stocks. We will also know how to check if its shares are trading at ‘undervalued price levels‘ or not. Let’s read further…
1. How to Decode Strong Business?
Let me rephrase my question. How to know if a business is good or not? From point of view of investors, the following will highlight if a business is good or not:
- Sales Growth: Sales is growing fast enough? How to know? Check the last 5 years’ sales data in Profit & Loss Account. Then calculate the sales growth rate (5Y-CAGR). Sales growth matching the inflation rate is considered moderate.
- Profit Growth: Profit is growing fast enough? How to know? Check the last 5 years’ net profit (PAT) data in Profit & Loss Account. Then calculate the PAT growth rate (5Y-CAGR). PAT growth matching the inflation rate is considered good. Read more about analyzing profit margins.
- EPS Growth: EPS is growing fast enough? How to know? Check the last 5 years’ EPS data in Profit & Loss Account. Then calculate the EPS growth rate (5Y-CAGR). EPS growth more than the inflation rate is considered great. Comparing EPS growth with the competitors will also be a good idea. Read more about high EPS and its growth.
- ROE: Is the company profitable enough for its investors? How to know? Check its ROE history, and if it is growing or not. First, calculate the ROE ( = PAT / Net Worth). A good company will either maintain its ROE or improve it, over a period of time. Calculate the last 5 years’ ROE. Then calculate the ROE growth rate (5Y-CAGR). Even if the ROE has increased marginally, it is outstanding.
- Debt: Is the company relying too much on debt? How to know it? Check its Debt/Equity ratio history, and if it is growing or not. First, calculate the Debt/Equity ratio ( = Debt / Net Worth). A good company will keep reducing its debt dependency over time. It means, with time, its Debt/Equity ratio shall fall. Calculate the last 5 years’ D/E ratio. Then calculate the D/E growth rate (5Y-CAGR). D/E growth in negative means, the company is doing good.
These are a few common checkpoints using which we can judge the business fundamentals of a company. But if you would like to do a more detailed stock analysis, do check my stock analysis worksheet. This worksheet will help you to estimate the following for your stocks:
- Free cash flow.
- Intrinsic value.
- Overall grading for stock.
2. How To Verify the Undervaluation of Stock?
We can use three financial ratios which will highlight if the current price of the stock is undervalued or not.
- P/E ratio: This is a price-to-earning ratio. The P/E ratio can be calculated by this formula ( =Price / EPS). Calculating the P/E ratio is easy. But I will suggest a better trick here. Calculate the last 5 years’ P/E ratio and plot a curve. How to do it? Prepare this table first. Check the PE trend in the last 5 years. How to do it? By plotting a curve. If P/E is falling, it is hinting at undervaluation, and vice versa.
|Year||Price (P)||EPS (E)||P/E|
- PEG ratio: This is the ratio between PE and “stock’s potential future growth rate”. The P/E ratio can be calculated by this formula ( =PE / EPS growth rate). PEG is a very useful financial ratio for estimating the price valuation of a stock. PEG less than 1, is a sign that the stock is undervalued. A stock with high PE, but low PEG (<1) is good. A stock with low PE, but high PEG (>1) is not good. Read more about the PEG ratio of stocks here…
- Dividend Yield (DY): This is the ratio between dividend per share and price. DY ratio can be calculated by this formula ( = Dividend per share/price). The dividend yield is a very reliable “value indicator”. Why? Because a stock that will pass this test will be undervalued for sure. How to do this analysis? Again we will rely on a 5 years trend, instead of one-year data. Calculate the last 5 years’ dividend yield, and plot a curve. A rising dividend yield is a sign that the share price is moving toward undervaluation. Read more about dividend-paying stocks here.
|Year||Price||Dividend Per Share||Dividend Yield|
I once read an article on “penny stocks for long-term investors“. The writer was completely biased against penny stocks. Probably he was looking at penny stocks just as a “trading option”.
But for me, penny stocks can also be a good long-term investment. Why? Because the growth potential of a good penny stock far exceeds its large-cap counterparts.
So how to go about investing in penny stocks? I have mentioned my filters for penny stock in the article above, but there is something more I would like to add here.
There is a difference between large-cap and small-cap stocks. Large-cap stocks are ones that have a proven reputation. But small-cap penny stocks have still not gone through as much scrutiny.
Hence I follow this strategy for myself in dealing with penny stocks. I use my filters to identify 2/3 penny stocks every 6 months. But I do not go ahead and buy them instantly.
I add them to my watch list and keep a track of them for at least a month. During this time, I try to read as much as possible about them. I use “Google Alerts” to receive notifications about them in my inbox.
Once I start feeling more confident about them, I go ahead and buy.
I used my Stock Engine (app) and applied the following filters to screen potential penny stocks. A few stocks that attracted my attention were Advani Hotels (Rs.85), and Integra Engg (Rs.99). Both stocks looked fundamentally strong. The filters I applied were: (1) Price < 100, (2) M.Cap < Rs.500 Crore, and (3) ROIC > 15%.
To get a list of top penny stocks trading in a price range of below Rs.75 per share, check our Stock Engine (App).
To find such stocks, I use the Stock Engine’s Big Screener. It allows me to filter stocks on basis of Market Cap. I applied the filter to screen all stocks whose Market Cap is below Rs.500 crore. After that, I applied the growth filter of EPS growth (>15%) and Operating Profit growth (>15%). Within these shortlisted stocks (33 numbers), Advani Hotels looked interesting.
Read More: How I’ll do day trading?
Very helpful & useful information for beginners.i have read lots of information about stocks but I got this link very helpful for me.
This is one of the most genuine blogs on investments..
Extra caution is needed when trading in penny stocks. Penny stocks trade with low volume and sudden spikes can occur in its price.
I really want to learn about your screener. can you please tell how can i contact you..
If you can suggest any good penny stock which can turn into a multibagger by next year end
i am also looking investing in low price penny stocks and you have shared this good article.everyone should invest in penny stocks but with proper knowledge.
Hi,am interested to buy penny stocks. Plz suggest me which stocks are good for short term investments .
Need to invest in Penny Stocks
Very impressive bro
Want to buy yr penny stock analysis to invest in penny stks
Pl giv details nd pmt
Method. Hard copy?
i am interested in share market
Hey i am novice to the stock and this article helped me alot to gather information about penny stock but as you got a gujju friend . i need a one as well to whom i would ask a questions about stock as there is lot of confusion in my mind . With one i can exchange my ideas .
Sir I am new to this, I can invest 5k but need your guidance on which shares to invest.
Hi Mani what do you think of Navneet education.
Best penny stock for 2020. I invest in sanwariya consumer share. Thank you for best guidance and best article for sharing.
Very nice information shared by you to understand basics and important for Share Trading
Hope you share regular updates on this blog.
Thx bro …to help ppl
Very useful information.
Thank u very much
Very helpful & useful information for beginners.i have read lots of information about stocks but I got this link very helpful for me.
Thanks brother you are good person
Pls can I have your contact number.for further details.
Very informative and man you have very very good knowledge.Your analysis process is awesome.
Penny is not your usual penny stock picking website. We are a team of analysts and investors in the field of selecting penny stock picks. We have gotten used to seperating the ordinary from the extraordinary when it comes to the stock market, especially when it comes to researching and reviewing penny stocks trading on the OTC Market and Pink-Sheets exchanges.
I have included your LIST OF INDIAN PENNY STOCKS WITH STRONG FUNDAMENTALS 2019
These shares are very attractive and i will like to buys those share for a long term investment.Can you advise the holding period and the profit margin for these shares
hi arun, can i get ur analysis stocks pls for validate
Looking so real good penny stocks.
For a beginner i always feel long term trading is a safe path, but your article about low cost penny stock forcing me to change my opinion…. please do post such article .
Lucid and stimulating. Please add caveats on GSM and illiquidity in penny stocks.
Nice information…gained some knowledge.
I have just now subscribed to your Excel stock analysis chart. Can you please mail me the list of best penny stocks 2019 posted in your blog.
what is he, your servant?
How i can contact you and got your service
Please share list
Good .highly educative. Most useful for begners.
Very Nice and Highly Informative.
nice , a simple understandable write-up for common man
Very good information. Keep it up. Regards
Great information sir. This is one of the most genuine blogs on investments..
Sir,I have not entered Indian share market till now but continuously studying different aspects of Indian Share market for about two months.The concept given you(Mani sir)under the topic..list of good low price shares to buy in India(Get money rich)is very clear cut,attractive n deeply seated in mind .Sir,pl.let me inform…as a Nepalese citizen can I be able to get registration in Indian share market. If yes then how?.
I am not sure, but I think investing directly in Indian stocks may not be possible for a Nepalese citizen. But investing in equity through mutual funds route may be possible. I will suggest you to check this link…Thanks for asking.
9 Peeti Securities = 9 Preeti Securities
i am using Balrampurchini Mills Ltd. share for intraday and long term holdings. could i get an advice about this share for intraday and long term holding
very useful and informative article.
request to make some alignment setting for making this article in pdf file and printing the same.
Thanks for your comment. Regarding print setting, I think you should get your system’s print set-up checked. Other way is to copy the content, paste it in MS Word and you are good to go. Thanks again.
The Market Price and ‘valuation price’ of the 10 stocks is the same. I request for a confirmation, please – as it seems difficult to believe that the market price and price valuation can match exactly. Thank you and with best warm regards . Shaukat Ali
In both the tables, “market price” of stock has been shown.
With respect to the market price, stock’s price valuation has been indicated using PE, PEG & D.Yield.
whare is small cap no need panny stock
I am using zerodha and I tried to purchase Unitech for intraday trading but zerodha’s RMS department rejected my order. Zerodha’s RMS department doesn’t allow me to purchase Unitech for intraday trading or any other penny stocks. Do you know any online broker that will allow me to purchase penny stocks for day trading.
You can not buy the shares people not want to sell. Suppose you wake in morning and go to nearest milk shop and the shop keeper don’t want to sell you milk. It is not because he don’t want profit but the all milk have been sold to perticular cutomers and no one os selling back
Get me low price penny stock tips