Investors Shift Attention to Penny Stocks 

As the domestic stock market maintained its positive momentum in early 2024, Kayode Tokede and Esther Oluku examine some penny stocks investors can key into and what makes these stocks attractive as prices of large-medium capitalised companies hit roof-top

Investors on the stock market of the Nigerian Exchange Limited (NGX) in 2023 gained an average 45.9 cent return and N13 trillion in market capitalisation.

The market in 2023 beat the inflation rate (28.2per cent as of November 2023) as the investors, most especially foreign investors keyed into undervalued stocks to boost their position following the Federal Government’s foreign exchange unification and removal of subsidy on Premium Motor Spirit (PMS) or fuel.

Also, of the 13 companies whose shares appreciated on the floor of the Nigerian Stock Exchange, on Wednesday last week, six penny stocks quoted companies were listed among the top gainers leaving the seven other gainers to medium and large capital stocks.

As investors grapple to keep their capital afloat amidst an all-time high inflation rate of 28.2 per cent, the Nigerian stock exchange has posted a steady rise in the competitiveness of penny stocks in recent months.

Analysts noted that the recent delivery by the Central Bank of Nigeria (CBN) of some outstanding matured foreign exchange forwards in some banks provided more support to the stock market “as investors continue to assess opportunities that may open up in a post-foreign exchange backlog environment”.

The stock market growth in 2023 was influenced by gains recorded in large-medium capitalised stocks including Airtel Africa Plc, Dangote Cement Plc, MTN Nigeria Communication Plc, BUA Cement Plc, BUA Foods Plc, Zenith Bank Plc, Guaranty Trust Holding Company Plc, Geregu Power Plc, among others.

Although most of these companies beat the inflation rate in 2023, their stock price significantly appreciated, making it difficult for prospective investors to buy or increase their holdings in some of these companies.

For illustration, the stock price of Airtel Africa closed in 2023 at N1,887.00 per share, gaining 15.4 cent from N 1,635.00 per share it opened for trading. An investor with N50,000 can only buy an estimated 26.5 units of Airtel when the price was trading at N1,887.00 per share as of December 29, 2023.

The current price of Airtel Africa as of January 10, 2024, has increased to N2,000 which means investors with N50,000 can only buy an estimated 25 units of the telecommunication company aside from commissions.

Also, trading at N282.00 and N44.00 per share as of January 10, 2024, investors with N50,000 can only buy 177.30 and 1,136.36 units of MTN Nigeria Communication and Guaranty Trust Holding Company respectively, excluding commissions.

Penny Stocks to the Rescue

The stock market momentum has instilled optimism for a potentially bullish market in 2024, fueled by the NGX All-Share index crossing 83,000 basis points.

With the quantum of holding small units, some percentage of retail investors have opted to take a position in some penny stocks as another means to invest in listed small-capitalised stocks quoted on the Exchange.

As defined, penny stocks refer to shares in companies with a low price and low trading volume. Because these markets have low liquidity, there is also high volatility.

It’s crucial to remind investors that investing involves inherent risks, and careful consideration is essential before making any decisions. 

By understanding promising sectors, conducting diligent research, and employing prudent risk management strategies, investors can navigate the exciting opportunities that lie ahead.  

Some of these penny stocks appreciated by over 700 per cent in 2023 and before now, these companies’ average price was hovering around N5-10 per share on the Exchange.

Interestingly, most of these companies over the years have failed in dividend payout to investors.

However, analysts believe that these penny stocks can provide good returns on investment due to their potential for share price appreciation in the medium term.

Typical Penny Stocks on NGX

Investors who invested in Transcorp Hotels Plc, Chams Holding Company Plc and CWG Plc, among others witnessed stock price appreciation in 2023; with price gain that ranged from 721.8 per cent to 1022 .9 per cent.

These companies emerged as best-performing stocks in 2023 as investors demand soar.

For instance, Transcorp Hotels posted the highest capital appreciation as the share price jumped from N6.25 in 2022 to close at N70.18 on the last trading day of 2023, an increase of 1022.9 per cent. Transcorp Hotels is the hospitality subsidiary of Transnational Corporation of Nigeria (TRANSCORP).

Its market capitalisation rose to N718.8 billion at the last trading day of 2023. With a share price appreciation of 1022.9 per cent, Transcorp Hotels emerged the best-performing stock on the NGX in 2023.

Chams Holdings sustained its stellar performance in 2023 as the frontline financial technology company’s share price rose by 795.5 per cent from N0.24 at the beginning of 2023 to close at N1.97. 

Chams HoldCo migrated from a loss of N135.81 million in the third quarter ended September 30, 2022, to N255.1 million in the third quarter of 2023.

In a recent media interview, the Company’s Group Managing Director, Mrs Mayowa Olaniyan, attributed the performance to the gains from the ongoing transformation in the entire group, which comprises ChamsSwitch, ChamsAccess, CardCentre, and ChamsMobile, its subsidiaries.

The third best price gainer in the review period was CWG Plc, whose share price rose from N0.92 at the start of 2023, to N3.96 per unit at the end of the trading day in 2023, an increase of 721.8 per cent.

The reported N534.04 million profit in Q3 2023 from N432.06 million in Q3 2022 impacted CWG stock price appreciation in 2023.

Other companies that made the league of the top 10 were: Transnational Corporation of Nigeria (TRANSCORP) 676.4 per cent; MRS Oil Plc, 644.7 per cent; Northern Nigeria Floor Mills Plc, 639.8 per cent; Japaul Gold and Ventures, 507.1 per cent; Ikeja Hotels, 571.4 per cent; FTN Cocoa Processing, 410.3 per cent and Infinity Trust Mortgage Bank, 372.44 per cent.

Outside the top 10 performing stocks in 2023, an investigation by THISDAY revealed that Fidelity Bank Plc appreciated by 149.42 per cent, FCMB Group appreciated by 92.2per cent from N3.85per share it opened for trading from N7.40 per share, while Jaiz  Bank rose by 111 per cent to N1.94 per share from N0.92 per share it closed for trading in 2022.

Other notable stocks with a significant increase above the inflation rate are AXAMansard Insurance which gained 175 per cent, AIICO Insurance 36 per cent and Abbey Mortgage Bank which increased by 31 per cent to N2.22 per share as of December 29, 2023.

Capital Market Operators’ Views

The Chief Executive Officer of Wyoming Capital and Partners, Mr. Tajudeen Olayinka explained that investors tend to rotate out of overvalued stocks nearing their peaks and seek opportunities in sectors with relatively lower prices as the stock market continues to appreciate.

According to him, “When the market is positive, the tendency is for investors to move from stocks where their prices are very high-almost reaching their peak to other sectors where the prices of stocks are still relatively low and take a position.

“This behaviour echoes the market boom witnessed about two decades ago, where investors actively explored diverse sectors and astute players identified value in penny stocks. Numerous such stocks experienced significant price surges, even without strong fundamentals.

“What we are witnessing is almost equivalent to when there was a market boom about two decades ago. The tenets then were that investors are just roaming around the different sectors of the market -from one stock to another. 

“The astute investors then anchored on penny stocks. And many of these penny stocks moved from 50 kobo to N20.00 without any fundamentals.”

He emphasised the need for investors to carefully analyse and reach out to their stockbrokers when the need arises.

He also advised investors to prioritise due diligence and focus on identifying penny stocks with strong underlying fundamentals and growth potential.

“The good thing about investing in stocks is that it is a win-win affair, there is safety of capital because it is a regulated environment.   Investors should look at penny stocks like AIICO Insurance, AXA-Mansard, Jaiz Bank, and Chams as stocks that will do well in 2024,” he added.

The Executive Vice Chairman of Highcap Securities Limited, Mr. David Adonri explained that due to the prevailing sustained positive momentum across the stock market, finding penny stocks with solid fundamentals has become a challenging task.

He emphasised that investors prioritising safety, liquidity, and profitability of their investments can achieve their diverse investment objectives through stocks, regardless of their capitalisation status—be it highly capitalised or low-cap.