Editor’s note: This article was first published in September 2013, in the middle of Spain’s economic crisis. The share price rises, latest results and Quabit’s 0.04–0.05 euro prices refer to that time; several of these companies have since gone through restructurings or takeovers. Penny stocks are highly speculative and many lose most of their value. This 2013 article is kept as a historical record and is not investment advice.
In the last few days, enquiries about Ezentis, Deoleo and Quabit have tripled, especially given how much they have gone up. Most people know that the big investment opportunities are not in the IBEX 35 index but in the Mercado Continuo (the Spanish continuous market, where the rest of the listed companies trade), since that is where we find companies worth a few cents and badly beaten down. Those that survive this crisis, and even come out of it stronger, will not rise 20, 30 or 90 percent: their return could even be counted at 1,000%.
To begin with, looking at them today leads us into a very common mistake, which is trying to get into them once they have already risen. If you plan to invest in a penny stock for the long term, by the time the market sends it soaring you should already be in, as we were with Ezentis and Deoleo, and as some have been with Quabit, but…
I have always divided penny stocks into two types: plain penny stocks and investment opportunities. To invest in a penny stock, we should start by asking it for one single requirement, so as not to fall for technical or speculative rebounds: that the company has business volume (not trading volume on the stock market, but sales volume).
I don’t mind if it has losses or debt at first, but it must have the raw material of any business, which is business volume. With that raw material, the company can at least come up with strategies; without it, all that is left is to pray for its survival.
That is why I would draw a very big distinction between Ezentis and Deoleo vs. Quabit. To begin with, Ezentis and Deoleo have growing business and falling debt, while Quabit is still mired in growing debt and shrinking business. I know that in its latest results Quabit reduced its debt (albeit through asset sales), but its business volume has fallen drastically, so Quabit is just a penny stock, plain and simple.
In fact, if we look at the last few days of trading, it has behaved exactly like a broken stock. Broken stocks tend to rise 60% in a day and then fall 30 or 40 percent over the following days. That gives investors no peace of mind at all. It is the same behaviour Bankia showed in its day, with that 700% rise in a single morning, only to lose the entire gain in the sessions that followed.
That is why stocks like Quabit and Urbas carry much more danger than even Codere. But it is also true that if things go well and they end up saving themselves as companies by increasing their business volume, they would offer us dizzying returns. When we invest in this kind of company, though, we are entering the game of speculation in its purest form.
Even so, if you feel drawn to speculating in stocks like these, it is not advisable to get in after strong rises (they are moving trains); you should wait for sharp corrections before coming on board.
I am sure there are already many happy investors in Quabit, those who were loading up on shares at laughable prices (0.04 and 0.05 euros), just as I know there are now many investors trapped in the stock after buying at prices they should never have paid.
See also: Probably the mother of all stock market investing mistakes
Featured image: Xemenendura, CC BY-SA 3.0, via Wikimedia Commons.
