Magazine article African Business

Penny Shares Become Sexy: Small Listings on African Stock Exchanges, as Well as Bourses throughout the World, Are Suddenly Back in Vogue and Posting Returns Their Gilt Counterparts Are Finding Impossible to Match

Magazine article African Business

Penny Shares Become Sexy: Small Listings on African Stock Exchanges, as Well as Bourses throughout the World, Are Suddenly Back in Vogue and Posting Returns Their Gilt Counterparts Are Finding Impossible to Match

Article excerpt

Throughout the 1990s, major counters were the rage. The expanding blue chip market crowded out smaller companies to the extent they hardly got a look in or were given a second glance. Fired by last decade's blue chip rally, stock markets' big spenders sold their holdings in small companies and jumped onto the gilt bandwagon. What a difference a few years makes! Globally, blue chip equities have seldom been as unsettled as they have in the last five years and investors have taken a pounding. Now share trading's golden rule of 'buy low, sell high' is taking on a whole new meaning. 'Low' now translates into 'small' and small company investments are the 'in' thing to be doing.

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"The market is constantly abuzz with rumours of buy-out and merger opportunities," says Evan Jon, managing editor of Red Hot Penny Shares. "Managers are frantically buying shares in their own booming companies, and everybody's touting penny shares as the big opportunity of the new century."

While few pundits are gainsaying penny shares' rising popularity and potential high yield, some are not so sure that big company equity is "all that dead" right now. Others contend tech stocks are on the upward rebound, which could be simply another way of investors looking for new homes for their money while they await the blue-chip turnaround. Tech shares and penny stocks might well be closer relatives than the boffins previously realised. Both suffer from "risk-itis", have little history and are undeniably sexy.

According to market watcher Ciaran Ryan writing in South Africa's Sunday Times, dividends are making a comeback, with yields of 6% or more now making better sense than cash investments. "Largely ignored by investors at the height of the technology boom, dividends are back in favour," he maintains. "You have to go back a while to find a time when a 5% dividend yield offered a better after-tax return than cash in the bank or in a money market unit trust. With (South African) interest rates now at their lowest level in nearly two decades, banks have cut their deposit rates to the point where many shares offer higher returns from dividends."

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That's because interest is taxed at the individual's marginal rate, while dividends are tax-free.

That's all well and good, say penny share punters, but investors could be doing a lot better by putting some of that cash into small cap companies. Red Hot Penny Shares' Evan Jon trots out the figures to back his point of view. He contends that an investment in the Johannesburg Securities Exchange's All Share Index between June 2002 and February 2004 would actually have decreased in value by nearly 5% while selected penny shares would have grown by at least 26%.

Jon conceds that making money out of penny shares is no sure thing. "After all," he says, "why do you think you can buy these shares for less than R10? It's because in 90% of the cases they simply aren't worth any more than that, and that makes the 10% that are, so wonderfully profitable.

"A large number of the penny shares on the market are failing companies that are on their way out. They're cheap because nobody wants to buy them and the majority of the others are enthusiastic new start-ups that probably haven't got what it takes to survive."

The trick is to ferret around in the penny share haystack and if you're lucky you'll find the golden needle. And that means many hours of analysis and getting your hands on very hard to come by information to make fine judgements. But if you believe nuggets lie hidden in the small cap ore, that's the kind of effort it'll take to dig them out.

MONEY LOOKING FOR A HOME

It takes a hard stomach to put a bundle into gold these days; consider the precious metal's gold price turnaround of $420/oz in mid April to $380/oz in early May. At the same time gilts were behaving like a leaky boat on a stormy sea. …

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