Penny Stocks: Investing in the China Story May Be Worth More Than a Penny

Penny Stocks are very sensitive to the day’s headlines. That’s why many Penny Stock holders are speculators, preferring to buy the rumor and sell the news. However, there are some penny stock stories that investors might actually believe in.  Therefore may be willing to be more patient with their holdings. For such patient investors, China Pharma Holdings, Inc. (NYSEAMERICAN: CPHI) might just be a story worth more than a penny!

The Story

While developed world nations, such as the United States (2.60%), Canada (2.90%), Germany (2.90%), France (2.50%) and the United Kingdom (1.40%) are struggling to produce GDP growth approaching 3%, China’s recent numbers came in at 6.8%. While these numbers aren’t nearly as high as the 15.40% China scored in Q1 of 1993, they’re still better off than most other nations (barring Turkey (7.3% and India 7.2%). Better yet, they are consistent with GDP of the last several quarters.

So, what does this mean for investors in Penny Stocks? It simply means loads of opportunity. With a GDP in the 6.8% range for the last three quarters, a population of over 1.4 billion, and a growing middle-class, China has a lot to offer investors, especially given that these numbers are driven by solid domestic consumption, exports and investment. Investing in a China Story-dependent penny stock might therefore make good sense.

Also Read: Penny Stocks – Maybe Worth More Than a Penny for Your Thoughts

The Picks

Our pick, China Pharma Holdings, Inc (NYSEAMERICAN: CPHI), is a pharma development, manufacturing and marketing company based out of Haikou, in the People’s Republic of China, and traded on the AMEX. The company produces a range of drugs for treating cerebral cardiovascular diseases, central nervous system conditions, and other digestive and respiratory conditions. CPHI has an independent sales network, through which it markets, distributes and sells its products across China.

Source: Google Finance

The current price of $0.30 (intra-day Apr 23, 2018) is around 50% higher than the stocks’ 52-week low ($0.15), which could signal that there might be a discernable upswing in price movement. However, with a 52-week high of $1.45, CPHI has a long way yet before it reaches that milestone once more – something that technical investors should watch for.

Source: Google Finance

On a fundamental basis, some positive outcomes based on recent quarterly results (quarter ending Dec 31, 2017) are:

· Increase in Net Operating Cash flow to $0.93M (from $0,67M in Q-ending Sep 30, 2017)

· Rise in Sales revenue to $3.84M (from $3.16M in the prior quarter)

· Improving Gross Income of $0.64M (from $0.38M)

A bright spot is expectation that Chinese health care expenditure, as a percent of GDP, is expected to steadily rise to 9% (from current 5.5%-6.0% range) by 2035. That single factor could give CPHI earnings a tremendous boost. Investors should be warned though that, like most penny stocks, CPHI has not had a top-line (Net Income) worth taking note of (net losses of $13.82M, $2.19M, $2.28M and $0.96M for the past 4 quarters).

Over the course of 2018 the stock has moved from $0.173 (Jan 2, 2018) to its current intra-day price of $0.3021 (Apr 23, 2018). That’s a positive gain of nearly 75%. On a 120-day basis, the stock has run up by nearly 77%.

Cautions and Warnings

Generally speaking, Penny Stocks have a higher Beta value than many mid or large cap peers. A stock with a beta value higher than 1 is typically more inclined to market volatility than its peers that trade at beta values lower than 1. In CPHI, you are buying a stock with a beta of 2.28 (as of intra-day on Apr 23rd, 2018). And that means a LOT of volatility!

Source: Google Finance

So, what does that mean for you?

If you can’t stomach volatility, then this particular penny stock might not be for you. However, you might be able to mitigate that risk by holding other lower-beta stocks in your penny stock portfolio. That move will off-set any CPHI-specific downside volatility.

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If, on the other hand, you are a believer in the China Story, then you shouldn’t really worry about the high-beta attribute of CPHI. You’ll likely also experience positive price swings on news (such as illustrated in the chart above – when positive Chinese GDP numbers were announced on Apr 19th, 2018) to compensate for negative price moves over a period of time.

Author does not own any of the stocks mentioned in the article

Published by
Monty Rodrigues, Contributing Editor

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