The best long-term penny stocks? Here are 5 to watch

Penny stocks are a class of low-priced public companies. These low priced stocks offer the chance to double, triple or quadruple your money in the long run.

They can transform your 10,000 investments in tens of lakhs for the long term. That is, if you carefully select the fundamentally sound companies from the lot.

And who doesn’t like a bargain?

Unfortunately, penny stocks have a bad reputation for burning investors’ wealth. Most investors assume that these low-priced companies tend to have major fundamental flaws, faulty management teams, unfavorable competitive positions, and so on. In addition, the terrible price fluctuations scare them.

Penny stocks are known to erode wealth faster than any other group.

However, they also have the greatest upside potential of all equity groups. So if you do your due diligence and hold these stocks for the long term, you can make fantastic returns.

These cheap stocks may turn out to be the diamonds in the rough you’ve been looking for.

So with that in mind, we’re highlighting five long-term penny stocks that need to be on your watchlist.

#1 National Aluminum Company Ltd.

National Aluminum Company (NALCO) is a government entity that operates in the mining, metals and energy sectors. It is the largest integrated bauxite-alumina-aluminum-electricity complex in the country.

NALCO stock price has fallen 45% year-to-date (YTD).

According to documents filed in June 2022, the late Mr. Rakesh Junjhunwala sold his stake in the company. Although we don’t know the exact reason, fears of a recession leading to weak demand for resources and a stronger US dollar could be attributed to the same.

Aluminum prices have been volatile recently, due to geopolitical issues. Additionally, NALCO faced coal supply issues due to the disruption in global supply and demand, which further reduced profits.

All of this has caused the stock to be beaten in the past. However, none of this takes away from the fact that the company is a fundamentally sound stock.

Financial overview

m, consolidated FY20 FY21 EX22
Revenue

84,718

89,558

141,808

Growth (%)

-26%

6%

58%

net profit

1,382

12,995

29,520

Total debt

0

0

0

Debt to equity (x)

0

0

0

Source: Equitymaster

NALCO is one of the most effective players in the country. His performances bear witness to this. Sales increased at a 4-year CAGR of 10.8% and net profits at 21.8% over the same period.

This performance was reflected in the return on equity, which averaged 13.2% over 4 years. The company is a dividend payer with a 4-year average dividend yield of 7.2%.

Although the business has suffered in the short term, the company is well positioned to benefit from the growing demand for aluminum in the long term.

The strongest growth in terms of absolute demand will come from the transport sector. The shift from vehicles powered by traditional fossil fuels to electric vehicles (EVs) will increase from consuming 19.9 MT of aluminum in 2020 to 31.7 MT in 2030.

More than half of the growth in aluminum consumption comes from the transportation sector in Asia excluding China is expected to come from India (27%), Japan (17%) and the Middle East (12%).

In addition, the transition to green energies will strengthen the sector’s demand for aluminum, which will reach 15.6 MT in 2030 against 10.4 MT in 2020.

#2 Ircon International Ltd.

IRCON International, an entity of the Government of India, is a construction company involved in the construction of railways and highways, EHP (engineering and construction) substation and rapid transit system.

The largest source of revenue comes from the rail segment, which accounts for over 90% of business.

The company stands to benefit greatly from the government’s increased focus on infrastructure projects. He reported a large backlog over the next 1-2 years.

Moreover, IRCON has only one other government entity to compete with, Rail Vikas Nigam. However, there is talk of merging the two to form a giant monopoly. Not only will this boost capital allocation, but the business will greatly benefit from any synergies that may arise.

Financial overview

m, consolidated FY20 FY21 EX22
Revenue

53,911

53,498

73,797

Growth (%)

12%

-1%

38%

net profit

4,549

3,592

5,323

Total debt

0

3,121

13,044

Debt to equity (x)

0

0.1

0.3

Source: Equitymaster

The company’s leadership status allowed the company to grow. Revenue grew at a 4-year CAGR of 16.5% and net profit at 7.9%.

The average return on equity over 4 years is 10.5%. The balance sheet is strong, with negligible debt on its books. This allowed them to be generous to their shareholders with an average 4-year dividend yield of 2%.

#3 Genus Power Infrastructures Ltd.

Third on our list is Genus Power.

Genus Power offers end-to-end metering solutions to the power distribution industry. It is one of the largest players in the electricity metering solutions industry in India, with a 27% market share.

The company has developed “smart metering solutions” with the help of an in-house R&D center. Besides metering, Genus Power also engages in engineering, construction and contracting (ECC) for the power sector, which complements its existing business.

Smart energy meters are an essential part of advanced metering infrastructure. It is an essential part of the modern electricity infrastructure sector. The segment can strongly benefit from the ongoing power sector reform initiatives in the country, such as the reduction of high technical and commercial (AT&C) losses.

Furthermore, smart meters have the potential to make the electricity sector increasingly resilient, transparent, digitized and accountable, ensuring robust long-term demand.

Financial overview

m, consolidated FY20 FY21 EX22
Revenue

10,604

6,086

6,851

Growth (%)

0%

-43%

13%

net profit

735

697

584

Total debt

233

75

8

Debt to equity (x)

0

0

0

Source: Equitymaster

Genus Power’s business has been affected by the pandemic. However, total sales have increased by more than 12% over the past year.

The company is debt free. It reported a return on equity (ROE) of over 6% over the past year and a dividend yield of 0.4%.

#4 Grauer & Weil (India) Ltd.

Fourth on our list is Grauer & Weil (India) Ltd.

Grauer & Weil is the only company in India to offer comprehensive corrosion protection solutions on all types of substrates in various industry segments.

The surface finishing segment is the largest, accounting for over 88% of the company’s total revenue. The balance comes from engineering and commercial activity.

The company is doing well thanks to significant investments in the manufacturing sector and should benefit from it in the future.

Rising demand for automobiles bodes well for the company. In addition, growing demand from irrigation, water supply and sewerage sectors are also key growth drivers for the corrosion protection solutions segment.

Financial overview

m, consolidated FY20 FY21 EX22
Revenue

6,194

6,050

7,682

Growth (%)

3%

-2%

27%

net profit

758

688

788

Total debt

2

2

1

Debt to equity (x)

0

0

0

Source: Equitymaster

The company’s leadership provided a smooth road to profitability. Total sales and net profit increased at a 4-year CAGR of 12.1% and 5.4%, respectively.

Return on equity was strong, averaging 14.7% over three years. The company has rewarded its investors well, posting a three-year average dividend yield of 1.2%.

#5 Haldyn Glass Ltd.

Last on our list is Haldyn Glass.

The company has been active in the sector of soda-lime flints and amber glass containers for more than five decades. Simply put, the company manufactures glass bottles and containers for packaging fast moving consumer goods (FMCG), pharmaceutical, beverage, liquor and beer industries.

The vision of a plastic-free India has already ended the use of single-use plastic. Government efforts to limit the use of plastic in most forms of packaging are a major growth driver for the company.

The plastic ban has led to increased use of glass, and it continues to gain momentum as the preferred packaging option for environmental well-being.

The demand for glass containers and bottles is expected to grow well, driven by the world’s huge youth population and increasing urbanization. This bodes well for the company’s long-term business.

Financial overview

m, consolidated FY20 FY21 EX22
Revenue

2,294

1,779

2,128

Growth (%)

3%

-22%

20%

net profit

105

100

109

Total debt

0

0

0

Debt to equity (x)

0

0

0

Source: Equitymaster

Sales and profit grew at a 4-year CAGR of 6.9% and 13.8% respectively. However, returns have been low at an average of 7.2% over 4 years.

The company is debt free and has been generous to its shareholders, recording a 4-year average dividend yield of 1.9%.

In conclusion

Investors who are new to the market are generally attracted to investing in penny stocks.

Although they offer the potential for quick returns, you should remember that penny stocks can be very risky. They can fall as quickly as they can rise, eroding 50-70% of your investment’s value in a short time. This is why penny stocks are not for a low-risk investor.

Although you cannot eliminate these risks, you can certainly minimize them. A great way is to invest only 5-7% of your total stock portfolio in penny stocks. This will minimize your exposure, thereby reducing your risk.

In the end, it all comes down to one thing, research. If you do independent research and follow sound investment principles, you can spot the next multibagger stock (like Eicher Motors or Bharti Airtel) for your portfolio.

Disclaimer: This article is for information only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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