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 the Nigerian stock exchange market are small equities with relatively lower prices ranging from 50k to N5, they are small-cap stocks investors can make money on, via share price appreciation.
Local and foreign equities investors are showing growing interest in penny stocks because of their lower prices. Besides, 80% of emails and SMS I receive from newbies interested in stock market investment revolves around penny stock recommendations and the reason isn’t far from the fact that they can 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 1, 3 to 6months.
Penny stocks, when compared with big-cap or well-capitalised, offer the potential of earning greater returns on investment in terms of share price appreciation. For example, it is easier for an 86k stock to rise to N1.6 or gain 100 per cent in price appreciation in weeks than a big cap stock like SEPLAT trading at a price of N590 to double to N1,080.
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 off a high-priced stock. Let’s say you have N30,000 to invest in the equities market, that same figure, as of this write-up, will give you 34,883 units of Diamond bank at 86k (pre Access bank acquisition) and a lower 1321 units of Zenith bank’s stock at N22.7.
Another interesting advantage of Penny stock investing is that a 1 Naira increase in share price will earn you N34,883 profit on Diamond bank compared to N1,321 profit on Zenith bank.
This doesn’t mean that investing in penny stocks isn’t devoid of risk too. The same way, the price could easily rise by a double-digit percentage, that’s how it can also fall sharply. So, before investing in a penny stock, you are advised to do your homework to avoid picking the dead penny stocks.
How to pick the best penny stocks to buy in Nigeria
In this penny stock investing guide, I will be sharing my updated practical steps to identifying the best penny stocks to buy right now.
- Find Penny Stocks with Golden Crosses
As of when I updated this guide to picking penny stocks to trade, I had just closed two profitable trades in the stock market; the first is Sterlings bank which I bought at N1.6 and liquidated at N2, that’s 25% profit and Newrest ASL, which I bought at N4.95 and closed the trade at N7.
You may ask, how do you pick penny stocks that will make money? I focus on penny stocks with 50-day SMA crossing over the 200-day SMA. This is what we call Golden crosses.
50-day SMA measures the average price of a stock and how it is trending in the last 50days, which is equivalent to 3 months. This simple moving average is used by short-term traders who want to cash in from short-term trends. The 200-day SMA, on the other side, measures the average price of a stock over 200 days, which is equivalent to a year. This SMA is used by long-term traders to confirm the long-term sentiments of a stock.
When the 50-day SMA crosses and goes higher than the 200-day SMA, it is a sign that a stock is attracting attention and might be set for a further rally.
As of this write-up, here are stocks with 50-day SMA prices above their 200-day SMA:
2. Check the momentum in the last 3 months.
Before I pick a stock after golden crossover, I always check the previous momentum in the last 3 month; it has to be positive, atleast 10-15% up before the 50-day crosses the 200-day SMA. This is a clear sign that investors are already queuing up before the big rally.
Here is the performance of these stocks after the golden crosses:
While the overall NSE market index is down by 19.7% on a year to date basis, these penny stocks have delivered 68.52%, 54%, 32.54%, 32.39%, 32.14%, 26.62% and 15.97% in the same period. The golden crosses occurred after a strong 3-month rally which justified the possibility of a further rally as seen in the 1-month performances.
Profit taking is a normal activity in the market which is why Airservice and Custodian are down.
Here is a chart that explains the 25% rally on Newrest ASL (Airservice) stock after the golden cross:
The stock went from N4.99 to N7 before reversal.
Take a look at Sterlings bank’s stock:
The stock went from N1.6 to N2, that is 25% return in 10 days.
4. Check the fundamentals of your penny stock.
Not every rally is worth buying into, always check fundamentals of the penny stocks by looking at the profitability, liquidity and solvency ratios of the company.
- Is revenue growing?
- Is the company able to manage the cost of sales?
- Check interest cover to be sure that it can pay interest expenses.
- Are profit before tax, and profit after tax growing?
- Is EPS figure increasing?
- Are share price going up and outperforming the overall NSE market index.?
- Is Return on Equity growing while debt to equity declines?
- What is the current share price?
- Using the 10-year bond yield and risk premium, what is the fair value of the penny stock? for Newrest ASL, the stock has a fair value estimate of N10 (EPS TTM of N2.03/discount rate of 0.19 ) which is above the market price of N6.90, that is 44% upside potential.
- Is the price-earnings ratio above or below industry average? Newrest ALS P/E ratio is 3.39 below average.
- What is the PEG ratio? Typically, a PEG ratio close to 1 means that the stock is close to its fair value while a value below 1 means the stock is cheap. While the stock has surpassed its previous financial year, a P/E ratio of 3.39 dividend by a modest 10% growth rate means that there is more room for upside.
The strategy shared here isn’t dependent on the general market sentiment, it focuses on specific stocks that are rising faster than their peers so you can buy into opportunities and sell at 20-30% profit, which could come in days or weeks.