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Four important questions to ask when you invest in penny stocks

by , 08 January 2020
Four important questions to ask when you invest in penny stocks
So, you want to invest in JSE-listed penny stocks….

But you don't know where to start?

There are hundreds of stocks out there, and so little freely available information.

Today I'm going to run you through four crucial questions you should ask yourself before making any penny stock investment.

Think of it as the first cut - the criteria with which you can start looking at the penny stock investment sphere.

I'll give them to you now, so you can think of them as you read along.

Basically, these four criteria are what forms my POWA! Penny stock screening system.

#1 - Profits? Is the company growing profits in a sustainable manner?

#2 - Open Communication? Have management and the board of directors been open and transparent with investors, in good times and in bad?

#3 - Wow Factor? What's going on in the company that could act as a catalyst for rapid share price growth?

#4 - Assets? Do they have the cash to fund their growth? Is the company high in debt? Does it have a strong asset base to back up its share price value?

Now for some technical stuff about what's going on in the small-cap space right now.

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And I’ll show you exactly how you can build your personal wealth the old-fashioned way, using the same approach as Joe Kennedy, Norman Rockefeller and Harry Oppenheimer.
 
By the end of the enclosed document, I’m certain you’ll agree with me – It’s not what you know, it’s who you know. And you’ll also see that what I’m promising you is not a hoax, scam or swindle.
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Why bother with the research when you can ride the trend?
 
A colleague of mine recently made the point that following the trend is the ultimate decider whether investors make money on the market or not.
 
So, here’s what’s going on in our market right now.
 
If you look at the relationship between the JSE’s ‘Small Cap’ Index and the ‘All Share Index’ you see that for most of the past decade smaller shares have outperformed the rest.
  
Small Cap shares outperformed the All-Share Index for most of the past decade
 
 
 
The dark blue line is the JSE Small Cap index. The light blue line is the JSE All-Share Index (coincidentally the JSE Top 40 Index has the same pattern).
 
What you can see from here is that between 2011 and 2017 the Small Cap index steadily outperformed the All-Share index. Then in 2017 smaller shares peaked and started an almost straight-line descent, and the All-Share index outperformed them for the first time this decade.
 
Investors that exited Small Cap shares, and piled into larger ones via index funds are laughing for now.
 
They’re telling me “Why do I even bother doing research instead of just riding the wave?”
 
But this divergence is about to turn. You’ll see at the end of the chart the Small Cap index has bottomed and the trend is reversing.
 
My research proves these smaller shares are dirt cheap – and worth a lot more than their current low prices suggest.
 
According to BusinessInsider.co.za “South Africa now has some of the cheapest shares in the world”.
 
BusinessLive.co.za also reported SA’s “Small-cap sector is ‘among the cheapest equity in the world right now’”.
 
As you can see here – roughly by October 2019 Small Caps bottomed out – and have been slowly recovering since then.
 
What’s going on here?
 
Early November 2019 is when talks of quantitative easing around the developed world started again. Meaning lower interest rates to stimulate economies.
 
But what these lower interest rates really mean are that many countries will have negative real rates. So, investors go looking for riskier, higher returning assets again.
 
And that sends money away from bonds, into stocks. Especially small cap stocks, in emerging markets like SA…
 
Anyway, the point I am trying to make is this divergence between the Small-Cap index and the All-Share index could be the start of an incredible opportunity on the JSE.
 
Ignore the headlines and watch what the market is doing.
 
And the market is telling us small-caps could have more room to run with low inflation, low interest rates and increasing risk appetite.
 
 
The four questions revisited
 
So, if there is an opportunity, how do you go about seizing it?
 
Remember question one. You can reword it like this — Is the company growing its profits?
 
Let’s consider a company in my portfolio – DRD Gold.
 
It’s up 200% in the past year.
 
It’s passed the ‘profit’ test – the company grew both revenue and profit in 2018 and in 2019.
 
So that’s one question down.
 
Next up, looking at whether the company is transparently dealing with shareholders?
 
Well – it’s been open and accurate on construction plans, deadlines and targets for its new projects that stand to grow the company’s bottom line even further. What’s more – the company has a clear dividend policy and paid shareholders 20cps in dividends during September 2019.
 
Next – does the company have a further catalyst for share price growth?
 
Well, in my view there are TWO catalysts. The first is expansion of the business through building more gold retreatment plants. The second is the gold price. Looking at forecasts by the big banks, expectations are the gold price could rise further in 2020…
 
Finally, do they have the money needed to fund their growth?
 
Well, in its last financials the company sat on a cash pile of R280 million – with debt levels lower than 20% of its total equity value. So, it certainly has space to grow its bottom line further.
  
This is very important in the small-cap space as capital raises can be frequent and often come at a discount.
 
It’s all about timing your entry.
 
There you have it — a quick introduction to small-cap land and a chart that shows you why you should be paying attention to this space. I’ll be releasing my top 5 small cap stocks to buy in 2020 towards the end of January so keep a look out or simply join Red Hot Penny Shares today to be first on the list to receive the 5 stocks I expect to soar in 2020!
  
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares 
 
P.S. Don’t miss out, join Red Hot Penny Shares risk-free today. My publisher has very kindly agreed to a massive January discount for new members – simply go here to start your trial.
 


Four important questions to ask when you invest in penny stocks
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