There are numerous penny stocks – small-cap companies with a share price under R1 – on the JSE’s main board and they may seem attractive to retail investors, especially first-timers who want to enter the world of investment.
A few former mid-cap names – in particular construction companies such as Aveng, Basil Read and Group Five – have fallen to the penny-stock category as South Africa’s economy tanks under poor government policy decisions, and a dearth of fixed capital investment by companies.
Nevertheless, there are several penny stocks that shimmer and may prompt a closer look, but investors shouldn’t necessarily be adding them to their portfolios. finweek has identified four stocks that are geared towards a changed future economy, or pose value in terms of their share price.
The returns story on the FTSE/JSE Small Cap Index is a mixed one at best. The index – which includes those stocks not selected for the FTSE/JSE Top 40 Index or the FTSE/JSE Mid Cap Index – declined 4.1% last year, slumped 14.6% in 2018, rose 3% in 2017 and jumped 20.9% in 2016 (see the table below for comparison).
Considerations with penny stocks
The decision to invest in penny stocks should be premised on a solid analysis of a company.
“With penny stocks, much of the value lies in their prospective growth in income and as a result, historical valuations are of lesser significance,” says Ricus Reeders, portfolio manager at PSG Securities. He recommends two factors to look at when considering penny stocks due to margins in these companies typically being slim.
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