Business Today

More bang for your penny

You can make money in micro-cap stocks, but you've got to be cautious, patient-and lucky.

Nitya Varadarajan | Print Edition: September 19, 2010

An SMS message flashes on N. Kanakarajan's mobile phone, urging him to buy Cals Refineries at 70 paise. A 'refinery' stock for under a rupee may seem a steal, but Kanakarajan, who manages the Karur (in Tamil Nadu) branch of Anand Rathi Securities, senses a daylight robbery of the clueless investor. He quickly sends out e-mails and text messages to his clients, asking them not to fall prey to this one.

Run a quick Google search on Cals Refineries and you will come across news reports that range from a two-year-old one which claims that Cals will set up three refineries in West Bengal for Rs 20,000 crore to an article that describes the company as "a ferociously-traded" penny stock "about which very little is known".

And if you think 70 paise is a fair price to pay for a company that ostensibly sells refining and petrochemical products, remember that it has already appreciated by over 100 per cent in a month - in mid-July the stock was quoting at 33-34 paise! "People like to show off how their gamble paid off, but they don't realise that such speculation is often a roller coaster that crashes into the ground," says Kanakarajan, who is aware that his frantic warning messages will be ignored by many of his clients.

Cals Refineries isn't the only penny stock being lapped up by investors who range from pocket money-splurging college students to adventurous homemakers. Consider some of the other beguiling tips that flood the inboxes of punters during a typical trading day: Buy Vertex Spinning: CMP (current market price) Rs 2.6, target Rs 5. Buy FCS Software: CMP Rs 2.52, to go to Rs 4. Buy Birla Cotsyn: CMP Rs 1.13, target Rs 3. A few messages are also backed by apparent triggers. Example: Buy Sigrun Holdings: F I I order obtained, CMP Rs 14.40, target Rs 30.

Others are accompanied by rumours of a takeover: 'Buy Lotus Eye Care, to be taken over by Fortis', goes one text message. "I also get several SMSes on a single stock that elaborately build hype, much like a film climax,'' says the broker from Karur with a shrug. A penny stock typically is one that is quoting below its face value, and so is perceived to offer ample scope for appreciation.

That the absolute investments are lower than in a blue chip, and that even a runup by a few paise can result in spectacular returns can make such speculative investing alluring. Not all such stocks would be of dubious nature, but then again, most of them would need to be doing something really breathtaking to justify the spurt in their prices. For instance, in a year in which the broader markets have been by and large range-bound, why should a Netvista Information Technology soar by almost 400 per cent from Rs 1.8 to Rs 8.78 over the past eight months? Or why should the seductively christened My Fair Lady Ltd gain 122 per cent in this period - particularly when the damsel's bottom line is firmly in the red, with the losses of Rs 16 lakh larger than the top-line of Rs 5 lakh.

Those who've made a quick buck in penny stocks are a dime a dozen, but you won't find too many investors who've amassed a fortune from micro-caps over the long term. Arun Kumar Mukherjee is an exception. The 22-year-old sub-broker with Motilal Oswal Securities in Kolkata says he started off with Rs 1,000 eight years ago and has since grown his corpus to Rs 1 crore - thanks largely to penny stock investments. The difference between Mukherjee and most of the penny-punters is that the former actually delves deep into each micro-cap he invests in - he claims to have analysed 800 of them so far, and spoken to the managements of each. "Nobody had gone in-depth into penny stocks and I always felt this area had potential," says Mukherjee. "All stocks need to be analysed, and small-caps even more so."

What also sets Mukherjee apart from the rest of the speculative herd is that he is in it for the long term. "Don't look for quick gains," is his advice. And he has learnt that lesson the hard way. In 2002, Mukherjee invested in KEC International (renamed Summit Securities in 2000) when the stock was quoting at Rs 12. Mukherjee bought into the power transmission equipment company on the basis of its fundamentals. In the near term, the stock oscillated between Rs 9 and Rs 12. When the stock plunged under Rs 9, Mukherjee panicked and exited. A few months, later, KEC had touched Rs 20 - and in three years, it was at Rs 300. "I am still haunted by that incident," says the college dropout who learnt English by reading The Economic Times.

P. Ramkumar from Chennai is another investor who believes in the virtues of penny stocks. His strategy: Keep holding the "duds," for they will "definitely run one day". And even if they don't, he believes that one big win more than compensates for the turkeys in the portfolio. "I bought Shasun Chemicals at Rs 10 last year and now it is at Rs 80," says Ramkumar, who believes that while blue chips are fine, penny stocks should be a part of one's portfolio.

He's looking out for more of them. Still, Ramkumar's philosophy of holding onto duds doesn't always work. Tanmay Purohit, a sub-broker with Anand Rathi Securities based out of Nashik, gives an example of a company called IFSL, whose stock was quoting at Rs 250 in September 2005. After a stock split, the price stood at Rs 25, then climbed up to Rs 36 on the news that the company had technology that could turn garbage into power.

The promoter holding in IFSL reduced from 17 per cent in June 2005 to 0.27 per cent in September 2005 and never increased since. Today, investors are left holding junk: the stock is quoting at under 40 paise, and there's no power - in the stock or in the company's portfolio. Contrary to what Ramkumar believes, this is a stock that's unlikely to run again. Veering off The Street and slipping into Penny Lane can be rewarding - as long as you are sure that you won't hit a dead end.

- Additional reporting by RAJIV BHUVA

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