Penny Stocks Istanbul Stock Exchange’s (ISE)

 23% is comprised of stocks that are traded for ‘kuruş’ (subunit of Turkish Lira). Majority of these stocks belong to textile companies and to investment trusts.  

When directing their investments, the basic motivation of investors is to obtain revenues or at least to protect their principal capital. Without doubt no one knowingly or willingly chooses the type of investment in which his principal will wear away. It is the same for stock investments. The goal also of those who invest in stock exchange is to find the most profitable stock. As a result, choosing the stock to invest in or, in other words, the company to become a partner in is quite important.

 Many different criteria emerge when making that choice. In fact, it can be said that every investor has different personal criteria. However, factors like the company’s future growth potential, profit expectations and stock price are always important for every investor. In this regard, companies which have acquired a certain status in the market attaining a certain level and proving their success are seen as more reliable and are preferred by investors. Of course, not all investors prefer those companies which we can term as “large.” As we mentioned above, everyone has different investment plans and priorities. And this means companies, stocks of which are traded at relatively lower prices may also easily attract some investors’ attention. Penny stocks may bring high revenues to their investors since they are cheaper and are also rather speculative. But there are some facts that should be accepted beforehand by investors who invest in these stocks: Most of the time high risk may come along with penny stocks.  

Should Every Cheap Stock Be Bought?T

ogether with a company’s promising future potential, the availability of the purchase of its stocks at a suitable price is equally important for investors. But should every cheap stock be bought? At that point, it is necessary to think a bit more. When ISE is analyzed in general, it is seen that there are many stocks that are traded below their nominal value. It cannot be claimed that every company whose stock is traded at a low price is in a bad state. However, we can see that in general stocks at the ISE which are traded below 1 YTL and which can be termed as quite cheap usually belong to companies that are in financial trouble. Of the 326 stocks that are traded on the ISE, 76 stocks are priced below the nominal value. It means approximately 23% of the ISE is comprised of penny stocks. The total market capitalization of these stocks is 1.9 billion dollars. The ratio of the total market capitalization of these penny stocks to the total market capitalization of ISE-ALL SHARES index is 1.01%. Okan Tekstil has the lowest value among the penny stocks with its 0.18 YTL price. There are 9 companies on the ISE whose stocks are traded below 0.50 YTL. These are as follows: Transtürk Holding, Boyasan Tekstil, Tümteks, Menderes Tekstil, Makina Tarım, Selçuk Gıda, Avdansa Sasa, ÇBS Boya and Okan Tekstil. We must add that 9 other companies are traded at the Watch List Companies Market. In fact, most of the stocks trading below 0.50 YTL are traded at the Watch List Companies Market. 

Textile Sector Is In Trouble

Another noteworthy detail about the penny stocks is that most of these stocks belong to textile sector companies and to investment trusts. While 41% of textile companies quoted on the ISE are being traded below the nominal value, this rate rises to as high as 82% for investment partnerships. For textile sector, Okan Tekstil is the company that is traded at the lowest price. With 0.50 YTL per stock, Tacirler Yatırım Ortaklığı is the company among investment partnerships that is traded at the lowest price. This state of textile companies is mostly due to the difficulties that the sector has been living through. Being one of the critical sectors of Turkey and inspiring great expectations, textile has entered a difficult period since 2001. They have experienced bright periods in the previous years with the help of positive expectations but now stand out in the markets with their poor performances.

The weak competitive power that has been caused by China’s cheap products and high costs combine to give the sector hard times as companies began to close down one after another. With their export revenues falling down because of unfavorable exchange rates, textile companies’ problems further grew. Of course that situation was reflected in stock prices as well. Bad state of the sector, future expectations turning negative, deterioration of the financial health of companies in the sector all came together to drive investors away from this sector. Stock prices quickly fell down as there was not demand and as investors wanted to sell off those stocks. When we look at stock yields, this “deterioration” is already apparent. Most of the textile stocks’ yields remain at negative levels as compared with those of the last year. There are some exceptions among these stocks, of course. For instance; Mensa Mensucat which took important steps toward restructuring corporate debt stands out with a 132% rise as compared to the last year. But the overall picture of the sector is very dark. When we look at the average profit-loss rates of the stocks for cents from textile sector, there appears a 19% loss as compared to the last year (excluding the yield on Mensa Mensucat stocks). 

The Picture Is Dark for Investment Trusts

Textile is not the only sector on the stock exchange that suffers from a loss in stock yields. Investment Trusts which are traded on the ISE as penny stocks also cause problems to their investors. Before analyzing investment trusts, it is useful to write shortly about what they are, about their structures and functions in order to know them closely. Investment trusts are capital market institutions which invest in portfolios composed of various financial instruments using the money they collect from holders of savings. The resulting profits they obtain through their investments are distributed among investors according to their shares. Unit share values belonging to portfolios that are owned by investment trusts are usually higher than stock prices.

When the opposite situation is in question, it becomes more rational to buy investment instruments in the portfolio separately rather than directing one’s own savings to investment trusts. So, it is normal for stocks belonging to investment trusts to be of lower value than the share value. Additionally, in the case when investment trusts contain high amount of stocks, a fall in stock markets in general may cause great losses in stocks of these trusts. On the other hand, these losses may be higher than those at the index. When the penny stocks of the investment trusts trading on the ISE are observed, it is seen that all of them follow a negative course. The greatest fall was seen at the stock of Egeli Yatırım Ortaklığı. The average annual yield on all penny stocks is; -19.3%. The yield of ISE-100 was -0.9% for the same period. In other words, penny stocks have remained quite below the index with respect to yield. 

Attractive Aspects of the Stocks for Cents

In addition to all these negative aspects, penny stocks also offer considerable advantages. For example; since stock prices are lower, it is possible to buy more stocks for less money. Again, since price progress is greater than those stocks trading at higher prices, even small rises may bring higher percentage earnings along with. As is already known, penny stocks are quite speculative. And this means stock prices can show great rises in a short time. However, as falls can also take place equally quickly investors should move with utmost care. Every investment requires a certain level of attention and research. This is true also for penny stocks. Investments which are made without due analysis of the companies involved can turn into real nightmares. Investments that are to be directed into a company which has financial troubles have a high possibility of aggrieving their investors, as it was observed very often in the past. Of course this is not true for every company. Among the companies being traded at cent level are those ones financial conditions of which are improving, which make new investments and even declare profit growth. We should not omit these ones; because this type of stocks can become a good investment opportunity. For this reason, as it should be in every investment decision we must carefully analyze the company stocks of which we plan to buy, adopting a conscious investment approach.