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Best ASX Penny Stocks to Buy

best asx penny stocks

2022 has been a rough year for long-term investors around the world, as rising interest rates and restrictive monetary policy settings triggered a sharp sell-off in global equity markets. Significant supply-chain disruptions, Russia’s war in Ukraine, energy crises in Europe and the UK, and extraordinary fiscal support in response to the Covid-19 pandemic has sent consumer prices sharply higher in the developed world, forcing global central banks to respond aggressively.

The US Federal Reserve just hiked its target for the Fed Funds rate by a whopping 75-basis points for the third consecutive time in response to the most significant inflationary pressures in over forty years and has begun to taper its balance sheet, withdrawing much of the liquidity that fuelled the historic rise in US equity markets over the last two years.

In Australia, the RBA has taken a more cautious approach in its response to uncomfortably high consumer prices, raising the Official Cash rate from a record low of 0.1% to 2.35% in increments of 50-basis points per meeting – with one 25-basis point increase in May. Although the cash rate is at a 7-year high, the more conservative approach of the Reserve Bank of Australia has placed a premium on the local equity market, with the ASX 200 outperforming its US, EU and Chinese counterparts throughout this year.

This presents an opportunity for investors and traders to identify ASX-listed penny stocks that could be poised to outperform over the coming years. But first, what exactly are penny stocks?

What Are Penny Stocks?

Penny stocks are small-cap stocks that trade below a specified dollar amount, providing investors with the opportunity to purchase more shares of the company with less capital than would be needed to purchase a large-cap stock like Google or BHP. In Australia, penny stocks are those with a share price of less than $1 per share but can also include stocks that have share prices in the low single digits. They’re also generally small-cap stocks.

Why Trade Penny Stocks?

There are two main reasons why investors and traders are attracted penny stocks, and small cap stocks in general.

The primary reason is the potential for outsized returns due to low levels of liquidity and small-value market capitalizations. These two factors open the door for the share price to appreciate rapidly with much less volume than is required to influence the share price of a medium or large cap company.

The second aspect that attracts investors is the ability to purchase a vast amount of share with a relatively small amount of capital. For example, a trader with $100 in starting capital can purchase 1,000 shares of a company currently trading at 10 cents a share. If the share price doubles to 20 cents a share the trader makes a 100% return on their original investment. A return that is extremely hard to achieve when trading large-cap companies.

Risks of Trading Penny Stocks

One of the major attractions of penny stocks can also be one of its major risks; low levels of liquidity. This can make it incredibly difficult to enter and exit positions at optimal prices and can result in extensive losses due to the potential for outsized daily moves. The lack of volume traded in these stocks may also lead to complacency from investors, who may forget to monitor the stock as prudently when the price stagnates for extended periods of time. They are then ill-prepared to exit a position that moves against them quickly.

Identifying Good Penny Stocks

Make no mistake, identifying great penny stocks to buy that can provide traders with outsized returns is no easy feat. However, there are certain criteria that you can follow to narrow down your options and potentially unearth some big winners.

1. Understand Current Market Conditions

First things first, you must gauge whether market conditions are positive for equities and risk assets in general. For example, if the local economy is facing the prospect of a recession and fighting significant inflationary pressures, or there is a serious escalation in geopolitical tensions, it may not be the best time to trade small-cap stocks.

2. Understand the Company’s Fundamentals

This one should come as no surprise. Before investing in any company, or asset, you must do the required due diligence and research. Find out how the general sector of that specific company is performing. Is the firm profitable? Does it rely on equity or debt financing? These are all questions you must answer before jumping in and trading penny stocks

3. Keep an Eye on Insider Trades

A factor often overlooked by traders and investors is what is the management team doing with their investments in the firm. Are they actively buying more shares? If so, this may be a positive and show that they’re fully committed to making sure the company is successful over the long-term. However, if they’re actively offloading shares it may be time to jump ship. Clearly, they think that the company is overvalued and aren’t willing to risk their own capital, so why should you?

4 ASX Penny Stocks to Keep on the Watchlist

The following 5 penny stocks are listed on the ASX and have been selected using the following three metrics:

  • Current share price less than $2
  • A positive year-to-date return
  • P/E ratio less than 20 but greater than 1

1.     Perenti Global Ltd (ASX.PRN)

Perenti Global Ltd is a diversified global mining services group with businesses in surface mining, underground mining and mining support services. The firm released robust earnings for FY2022, with revenue up 21% and EBITDA up 12% to $426.4 million. Perenti’s management team also provided strong forward guidance for performance over the next three years, with CEO Mark Norwell announcing that “Perenti is positioned to deliver a step-up in cash backed profits in 2023, with further improvements expected to drive earnings growth through to FY2025 and beyond”. One to keep on the watchlist, especially given it is currently trading at $0.94 – significantly below its all time high of $4.21 set back in 2010.

2.     Myer Holdings Ltd (ASX.MYR)

Myer’s share price has been on a steady decline over the last decade, falling from a high of $3.84 in 2010 to a low of just 14 cents in 2020. However, the stock has since rallied significantly and could continue to do so given the strong sales growth its seen both in-store and online over the last 12 months. Indeed, the company has restarted dividend payments, which is a strong sign of confidence in its outlook over the next 12 months.

3.     Australian Agricultural Company (ASX. AAC)

Australian Agricultural Company owns and operates Australia’s largest cattle herd, producing and selling cattle and beef products. It is trading at a P/E ratio of 8.1, which is significantly below the ASX 200’s multiple of 27.99. The firm’s earnings have surged 201% over the last twelve months and could continue to grow over the year ahead on the back of the fastest acceleration in consumer prices in Australia since the early 1990s. Indeed, the 6.3% increase in the cost of meat and seafood nationally has padded AAC’s margins and will likely continue to do so over the next twelve months.

Expanded Australian CPI Report

penny stocks
Source – ABS

4. Horizon Oil (ASX.HZN)

Horizon Oil is an oil and gas exploration, development and production company with projects located in New Zealand, Papua New Guinea and China. Given the potential upside in crude oil and natural gas prices over the coming 12-18 months, HZN is one to keep on the watchlist. It’s share price has displayed a strong positive relationship with crude oil prices over the last five years and could outperform if energy prices remain elevated.

Horizon Oil Share Price Correlation to Crude Oil

best penny stocks asx
Chart prepared by Daniel Moss, created with Tradingview

Start Trading ASX Stocks with Vantage

Although the immediate months ahead will probably prove rather bumpy for global equity markets, there are still plenty of opportunities for traders to take advantage of, on the long and short side. You can trade Share CFDs of the companies listed above and others listed on the ASX with Vantage! CFD trading allows you to speculate on the price movement of a company’s shares without actually taking ownership of them. Trade Vantage ASX Share CFDs in both long and short directions from AUD $6 per side, which is ideal for traders of all styles.

Disclaimer: Vantage Global Prime Pty Ltd is authorised and regulated by the Australian Securities & Investments Commission (ASIC) AFSL no. 428901. The information is generic and does not constitute a personal recommendation or advice. Past performance is no indication of future performance and tax laws are subject to change. We do not represent that any content is accurate/current. Trading derivatives carries the risk of losing substantially more than your investment and may not be suitable for all investors. You should consider whether you’re part of our target market by reviewing our Target Market Determination (TMD). Please read our Product Disclosure Statement (PDS), Financial Services Guide (FSG) and other legal documents and seek independent advice to ensure you fully understand the risks before you make any trading decisions. This information is under the copyright to Vantage and may not be used without its prior consent.

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