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The top penny stocks to buy after this earnings season

by , 11 August 2016
The top penny stocks to buy after this earnings season
Now that July's wrapped up, this year's second to last ‘earnings season' has come to an end.

Considering the South African economy is teetering on the edge of a recession, results haven't been as great as investors would've liked.

In fact, 14 out of the last 25 companies to publish results have been negative growth.

Nearly two out of every three companies are seeing shrinking profits or making a loss at this stage…

So you can't just up and buy the market right now… You need to look for the outperforming shares.

That's why I've picked out the three best penny stocks as we head into the last stretch of 2016 - and markets look set for a recovery towards year end.

Before I list the three best penny stocks to buy, here's why I prefer penny shares right now.
 
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Why penny shares can outperform when the economy is in recession

Small Cap (and penny stocks) companies are tiny in comparison to the market giants. And that’s their benefit when the economy struggles.
 
They are nimbler. If need be, they can push other product lines. They often sell niche products that have a strong market no matter what the broader economy does.
 
Consider the R51 billion company, Resilient. Resilient is a property company, and it’s hit a bit of a snag in its latest results. The slowdown in the mining sector, together with higher interest rates, have affected its profitability.
 
The company is still high quality. But because of its size it can’t simply get rid of non-performing properties immediately. It also needs to hedge more of its debt when interest rates go up, because a large company like this simply can’t go without certainty.
 
In contrast Rolfes, a small chemicals company, continued investing. It increased its share in a niche agricultural chemicals company and bought a food chemicals business – all adding profit to its bottom line. And because of the niche-nature of its products, it managed to maintain and grow its bottom line even though the agricultural sector had a massive slowdown due to the drought this year!
 
The three best penny shares right now

Penny share #1 – Rolfes Chemicals
 
As I already mentioned, Rolfes increased its stake in Agchem, an agricultural chemicals business, and bought Bragan Chemicals. Thanks to these deals the company will see an increase in profits this year.
 In the first half of its financial year, revenue grew from R589 million to R625 million. Gross profit jumped from R136 million to R146 million. Earnings per share hit 28.35cps compared to 23.1cps in the previous year.
 
Based on the company’s trading update from 30 May 2016, it expects to report earnings of at least 47.8cps for the year ended 30 June 2016. That puts the share on a PE of 7 compared to the JSE average in the 20’s…
 
 
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Penny share #2 – Balwin
 
Balwin released results at the end of May 2016. The company’s revenue came in at R2 billion, with operating profit at R767 million.
 
It had earnings per share come in at 131cps. That puts the company on a PE of 6.6.
 
Balwin is in the property space, but the reason it’s been able to weather this storm and produce earnings like this is simple. It targeted the low-middle priced property market. One that is high in demand, and with pressure on buyers, more people are likely to downgrade into a lower end property than buy another high-end one!
 
Penny Share #3 – Wescoal
 
Wescoal finished the construction of a new mine in the past 12 months and started production from it. Thanks to this, the tiny miner has been able to aggressively grow its profits.
 
It increased profit after tax by 78.8% to R51.8 million compared to R29 million in the previous year. Earnings per share also hit 27.1cps - putting the share on a low PE of 6. It's up 108% in the past six months - but I see more share price growth as it will see higher earnings in the year to come as well! 
 
Here's to unleashing real value,


Francois Joubert
Editor, Red Hot Penny Shares
 
P.S. These three earning leading penny shares are all part of my favourite buys right now. Check them out. And if you want to know more about them be sure to look at my Red Hot Penny Shares newsletter.



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