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Rocket Stocks

Piggy has been assessing the ZSE performance for 2019 and it is interesting to note that the top gainer for the year was MedTech which registered the highest YTD performance of 7,500%. Other top movers were Ariston (689.6%), RTG (506.7%), ZHL (485.9%) and CBZH (396.2%).  MedTech Group is involved in the provision, manufacture and distribution of a wide range of products for the healthcare and consumer sectors. The company supplies government and private sector tenders as well as various pharmacies, healthcare providers, wholesalers and retailers. The group used to operate Zimbabwe Pharmaceuticals but disposed the business due to low local demand. The company manufactures the well-known Petroleum Jelly and Glycerine products. The share price movement of 7500% can be attributed to a penny-stock anomaly given a share price of 1.8 cents (market capitalisation of $54.7m).

Penny stocks (also known as micro-cap stocks, nano-cap stocks or small cap stocks) are common shares of small public companies that initially trade at low prices per share. It is also a term for inexpensive stocks that subsequently become highly lucrative holdings. The U.S. Securities and Exchange Commission (SEC) defines “penny stock” as a security issued by a very small company that trades at less than USD5 per share initially.  We highlight that such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks can be highly volatile and subject to manipulation through “pump and dump schemes”.  Another risk is that penny stocks have little liquidity, so holders of shares in penny stock companies often find it difficult to cash out of positions. The table below shows the 2019 performance of stocks (in ZWL and USD terms) with share prices less than 10 cents.

Performance of Penny Stocks on the ZSE in 2019

  Share Price (cents) 2019 YTD (ZWL) 2019 YTD (USD)
Zeco 0.02 0.0% -77.0%
MedTech 1.80 7500.0% 1650.5%
Truworths 1.90 41.6% -67.4%
NTS 2.15 19.4% -76.2%
GBH 2.40 50.0% -65.5%
Falgold 3.00 20.0% -72.5%
Star Africa 4.00 173.1% -37.1%
Willdale 5.44 259.8% -17.1%
ZPI 5.68 126.2% -47.9%
Dawn Properties 7.50 192.0% -32.1%
Unifreight 9.00 88.3% -56.6%
Fidelity 9.22 4.5% -75.9%

In most cases, a small percentage of penny stocks on a given exchange have truly novel high demand products while they commonly experience short term explosive trends on varied news-flow. These rocket stocks can jump 55% to 99% of a climax after several hours to a few days without reliable technical warnings and may then plunge at a time when most investors least expect it. This means that such stocks could prove to be high risk and high reward investments. The following infographic from outlines the basics around penny stocks;

In conclusion, penny stocks are considered to have higher risk and higher potential rewards than most other “more conventional” investments. Their speculative value can be extreme while their visibility and accessibility of operational results is usually very poor. Few financial professionals venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these highly explosive shares may do. Steer clear if you cannot stomach the risk!

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