Penny Stock Investing Made Simple

Have you heard of a popular problem-solving principle known as the Occam's Razor?

It can be summarised like this...

If you come across multiple solutions to a problem, the one with the fewest assumptions should be selected.

In other words, the simplest explanation is preferable to the one that is more complex.

Simple theories are easy to test. Simple solutions are easy to implement. It is all about simplicity.

Occam's Razor seems like a very powerful concept. Even great scientists like Newton and Einstein are believed to have used it to arrive at their revolutionary ideas.

Here are some examples that I found on the internet of how you can use Occam's Razor in everyday life.

• When you hear hoofbeats, think horses, not Zebras.
• If an ant draws a picture in the sand, it probably was a coincidence. Ants can't draw.
• If a tarot card reader gives an accurate reading, its probably luck and skill, not a supernatural force.
• If you hear loud bangs on Diwali, it is probably fireworks.

I hope you got some understanding of what Occam's Razor is all about. Simplicity over complexity.

Having said that, Occam's Razor is not foolproof. You must use it with care otherwise you can end up making costly errors.

Moving on to investing, does Occam's Razor have a role in stock picking? Can investing be made extremely simple?

Yes, we can certainly take inspiration from Occam's Razor and make investing as simple as possible.

I believe that a lot of investors don't pick their own stocks or don't manage their own portfolio because they think that investing is complex.

They feel that there is so much to monitor and so much to analyse. Hence, they get intimidated and leave the stock picking to experts.

Alternately, they also resort to relying on tips from friends or acquaintances and often end up burning their fingers.

But not anymore.

Today, I am going to show you some extremely simple and easy to use tips that will make it possible for you to do your own stock picking.

I will simplify the task for you so that you no longer feel intimidated.

So, let's get cracking without any further ado.

These are the financials of a penny stocks for the last 10 years. I define a penny stock as a stock that's trading at a 2-digit price. In other words, a stock that is trading at less than Rs 100.

This one's trading at around Rs 35 per share. The stock is none other than Pasupati Acrylon Ltd.

This is a more than a 40-year old company and is engaged in the manufacturing of Acrylic Staple Fibre. There are 3 major manufacturers of Acrylic Staple Fibre in India and Pasupati Acrylon is one of them.

The company has been dealing with customers since the last 25 years and has been getting repeat orders from them.

The company has also diversified into flexible packaging by starting commercial operations in September 2017. The company is almost debt free and has average return on equity of 16% over the last 10 years.

If you look at the last row i.e. the EPS, I think we can give the company an average EPS of Rs 4 share. In other words, I believe it can earn an EPS of Rs 4 per share in a normal year.

You see, I have a simple rule when it comes to recommending penny stocks.

Penny stocks are risky. Hence, you should demand a big, fat margin of safety while investing in them. So, once again bringing Occam's Razor into play, here's what I propose.

Consider buying a decent quality penny stock only if it is available at a single digit PE multiple i.e. a PE multiple of 10x or lower.

You should not pay a high PE multiple unless you are very confident that it is a high-quality stock with great growth potential.

Thus, having a thumb rule of not paying a PE multiple of more than 10x will keep you out of trouble in the world of penny stocks.

Coming back to Pasupati Acrylon, the stock is currently trading at a price of around Rs 36 per share and has an earnings power of Rs 4 per share as I just highlighted.

Thus, it is trading at a PE multiple of 9x.

At a PE multiple of 9x, the risk-reward is in your favour, and you can certainly consider keeping the stock on your watchlist.

Let's look at another stock.

This is a snapshot of the P&L statement of Bodal Chemicals.

The company is a 3-decade old organisation, operates 7 manufacturing facilities, and has more than 200 plus products. It is one of India's most integrated dyestuff companies and the largest manufacturer of dye intermediates.

As you can see from the March 2023 and March 2024 results, the company seems to be going through some tough times lately.

However, the impression that we get from management presentations and their interviews is that this is a temporary setback and has happened mainly because of global slowdown.

Thus, there is a strong chance of recovery in the near future.

Now, based on its EPS over the years, we can safely assume the earnings power of the company to be around Rs 10 per share.

The stock currently trades at Rs 75 per share, implying an attractive PE multiple of 7.5x. As I said earlier, for a penny stock, a PE multiple of 10x or lower is a good proposition. It puts the risk-reward in our favour.

Thus, it will be fair to say that Bodal Chemicals is the second penny stock that can be put on your watchlist.

Here's the third and the final penny stock that I have for you today.

South Indian Paper Mills is also going through tough times of late.

And like Bodal Chemicals, a turnaround is on the cards. The promoters have more than five decades of experience in the kraft paper industry and has reputed clients like Nestle, Reckitt Benckiser, Britannia, and Parle Agro.

The company has also forward integrated into packaging material.

Coming to the stock's earnings power, again, like Bodal Chemicals, it will be fair to assume the earnings power as Rs 10 per share.

At the current share price of Rs 74 per share, the stock trades a PE multiple of around 7x its earnings power.

So, there you are. Three penny stocks that were shortlisted based on a few very simple principles and inspired by the concept of Occam's Razor.

I know what you are thinking. You are thinking that my 3-stock list does not have any stocks from the hot sectors like solar energy, data centres or even EVs.

As I said earlier, I am trying to keep it simple. First, I think that most stocks from these so-called hot sectors are trading at very expensive valuations.

There's not enough margin of safety in the current valuations.

Besides, investing in these companies will require predictions on their future growth rates and an assessment of their execution capabilities. In fact, a lot of them do not have even have a financial track record going back many years.

So, predicting a clear winner from the many companies occupying these sectors is a complex process. It is not simple at all.

The three penny stocks that I highlighted today have none of these problems.

I am quite confident that if you put together of portfolio of 15-20 penny stocks all having the characteristics that I just highlighted, you won't get a bad result from your investments.

In fact, there's a good chance you can outperform the market by a big margin.

It is really this simple to be honest. However, majority of the investors don't like simplicity. They don't like Occam's Razor. They like complexity and want to invest in difficult industries like solar or EVs where the future is very hard to predict.

Shun the complex and opt for simplicity. Trust me, it works.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)