Can fundamentally strong penny stocks turn multibaggers?

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Investors will consider themselves lucky if the penny stocks they picked made them super rich. However, in choosing a really valuable stock, an investor will look at a company’s good fundamentals and its earnings potential.

Moneycontrol has analysed penny stocks which became multibaggers in the last ten years. We screened BSE universe stocks which were trading below Rs 10 per share a decade ago which now have become Rs 100. To make our search even more interesting, we considered stocks which entered the Rs 2000 market cap club last week.  About 15 stocks met the above two criteria.

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In addition to examining stock price movement, we also delved into the fundamentals of these companies. We used two filters, namely, return on equity (RoE) and return on capital employed (RoCE), both of which soared over 20 percent in each financial year over the last decade.

Only 3 stocks passed all the criteria. They include Symphony, Mayur Uniquoters and Kitex Garments.

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Will History Repeat?

We went a little further and attempted to discover if there are any cheaper stocks available in the market. Keeping Rs 50 as a threshold of a stock price, we searched for scrips whose RoE and RoCE also consistently delivered 20 percent growth in the last three fiscals.

There were five companies which met the above criteria. They include Gujarat Themis Biosyn, Stampede Capital, Lypsa Gems and Jewellery, R Systems International and Pincon Spirit. However, as a caveat, the performance of these stocks is completely dependent on the market.

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In the last three years share price of Gujarat Themis Biosyn and Pincon Spirit rose 132 percent and 92 percent, respectively. However, the rest three have given negative returns between 20-50 percent.

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