Best Penny Stocks to Buy in Nigeria – Learn the Fundamental & Technical Analysis to Know How to Invest In Profitable Penny Stocks in Nigerian Stock Exchange.
Penny stocks in Nigerian stock exchange market are small equities with relatively lower prices ranging from 50k to N10, they are small-cap stocks investors can make money on, in terms of share price appreciation.
Local and foreign equities investors are showing growing interest in penny stocks because of their lower prices. Besides, 80% of emails I receive from small traders revolves around penny stock recommendations and the reason isn’t far from the fact that they can afford to buy more units even with little money.
While some investors are buying in anticipation of improvements in their status and future potentials, others might be buying these stocks for the quick return it offers, say 3-6months.
Penny stocks, when compared with big-cap or well-capitalised or stocks in the premium index, offer the potential of earning greater returns on investment in terms of share price appreciation. For example, it is easier for a 90k stock to rise to N1.8 or gain 100 percent in price appreciation in weeks than, say a stock like SEPLAT trading at a price of N630 to double to N1,260.
Again, with the same Naira amount of money in your pocket, you are most likely to acquire more quantities of low priced penny stocks than you would get of a big-cap priced stock.
However, investing in penny stocks isn’t devoid of risk too. The same way, the price could easily rise by a double-digit figure, that’s how it can also fall sharply. So, before investing in a penny stock, it is proper to do your homework to avoid picking the wrong stock.
How to pick the best penny stocks to buy in Nigeria
In this penny stock investing guide, I will be sharing my practical steps to identifying the best penny stocks to buy right now.
- Focus on top sectors.
The first step to picking the best penny stocks is to find growing companies that will benefit from new economic policies. I always say it whenever I discuss stock market trading tips with my clients, “irrespective of how great your company is, an estimated 47% of its financial performance will be influenced by the sectoral direction” why not find top sectors investors are throwing more money into and then pick penny stocks in those sectors?
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As of this writing, Healthcare, Financials & Energy sectors are top performers to focus on.
If I am looking for the best penny stocks to buy right now, it has to be in healthcare, financials or energy or else am not buying.
2. Find top performing stocks in these top sectors
I already said that my definition of penny stocks are equities that trade below N10, here, we will be looking for penny stocks that are outperforming the overall sector indices. For healthcare, only penny stocks that had beaten the 56.32% sector growth qualify for further analysis.
Let’s look at stocks that have increased more than the healthcare sector index:
Glaxosmith Kline and Fidson Healthcare are the two top performing stocks that are already up more than the healthcare sector index of 56.2%. Their share prices are already up by 61.27% and 54.05% respectively. Remember, we are only looking for penny stocks below N10.
3. Find the penny stocks among these top performers.
You already know which stock is a penny, Fidson Healthcare Plc. My next question is “is Fidson a profitable small-cap company?”
4. Check the fundamentals of your penny stock.
When I check fundamentals of penny stocks, I focus on the profitability, liquidity and solvency ratios.
- The company’s revenue grew from N7.6 in 2016 to N14bn, that’s 45.7%.
- The cost to income increased to 49.2% (46% in 2016), this is a result of a significant increase in the cost of sales.
- The interest cover, a measure of how easily the company can pay its interest expenses on outstanding debt, increased from 1.6 to 2.5.
- Profit before tax increased by 275%, from N444m to N1.5bn while profit after tax grew by 216% to N1bn
- EPS expanded significantly by 238% to 71k compared to 21k reported in 2016. This figure is the company’s highest earnings in 5 years.
- The share price is up by 54% on a year-to-date basis, outperforming the overall NSE market index.
- ROE also increased to 13.1% (4% in 2016).
- As a result of the settlement of the company’s interest on loan and borrowings, debt to equity fell to 35% ( from 51.5% in 2016).
- The company declared a dividend per share of 20k compared to 5k paid in 2016.
- The current share price is N5.7 while EPS is 77k.
- Using the 10-year bond yield of 13%, the stock has a fair value of N5.9 (0.77k/0.13)
- Using the re-investment rate and return on equity, the expected growth rate of this company is 9%.
- The price-earnings ratio is 7.4.
- PEG ratio (7.4/9) is 0.82, which indicates an undervalued stock with little upside. Typically, a PEG ratio close to 1 means that the stock is close to its fair value. Fidson Healthcare stock price, at the point, is already close to its fair value (N5.9) which explains the little upside potential.
- Technically, the stock is overbought on weekly and monthly chart.
At N5.7, I’d rather wait for existing investors to take profit before buying Fidson stock.
This is a practical demonstration of how I pick the best profitable penny stocks to buy in the Nigerian stock market. Fidson Healthcare is a potential penny stock but the time to buy isn’t now as the stock is already up. As a short-term trader, I am patiently waiting for sell-off to join the next move. But, if you are a long-term investor, you can buy now.
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