[Update]: Were you brave enough to invest in these penny stocks in 2018?

With the JSE ending the year in heavily negative territory, a return of 185% in 2018 sounds like a dream. Yet that is what investors in South Ocean Holdings would have seen last year.

The company, which owns firms that manufacture low voltage electrical cables and other electrical goods, began the year trading at 28 cents per share. At the end of December, it was at 80 cents.

It was, however, by no means a slow and steady rise to get there. The performance included a spike from 50 cents per share up to the 80 cents level on December 31 alone. That is a jump of 60% in a single day.

This was a particularly extreme event, but investors in a counter as thinly traded as South Ocean have had to be willing to accept some rather wild volatility as a matter of course. The table below shows how the stock experienced a number of substantial one-day movements, both positive and negative, in 2018.

South Ocean share price movements, 2018
DateOpening priceClosing priceMove
January 1844 cents27 cents-38.64%
March 922 cents35 cents59.09%
June 748 cents32 cents-33.33%
July 539 cents50 cents28.21%
August 2055 cents36 cents-34.55%
August 3140 cents50 cents20%
September 2050 cents40 cents-20%
December 3150 cents80 cents60%

Source: Profile Data & Moneyweb

TeleMasters

Another stock that kept investors on the hop was TeleMasters Holdings. Shares in the telecommunications and cloud-based solutions service provider ended the year 130% up, but it was a wild ride getting there.

The counter started the year at 50 cents per share. This was way off the highs of R1.50 per share it reached back in May 2014.

It had reached 64 cents per share by the start of February 22, but closed that day at 45 cents. That was a single day drop of 29.7%.

This was however more than made up for less than two months later. On April 10, the share opened at 44 cents, and closed at R1.15.

This one-day gain of 161.4% might seem eye-watering, but it was by no means the first time that TeleMasters shares had done something like this. In June 2017, the shares jumped from 31 cents to 75 cents at the start of the month, dropped back to 29 cents a few days later, before spiking again to 75 cents before the month was out.

Like South Ocean, TeleMasters stock was also boosted by a transaction near the end of last year. On December 12 the shares moved from 70 cents to R1.15, which is where they ended the year. That 64.3% jump accounted for more than half of the counter’s full year gain.

Verimark

Verimark Holdings was another penny stock that delivered an extremely positive calendar year performance. It ended 2018 up 77.2% after climbing from 79 cents to R1.40.

The counter is slightly more liquid than South Ocean and TeleMasters, but it still bounced around significantly for a lot of the year. The table below shows the highest and lowest closing prices in each month of 2018, indicating how it went through a number of ups and downs over this period.

Verimark share price, 2018
 LowHighVariation
January70 cents85 cents21.43%
February71 cents87 cents22.54%
March74 cents92 cents25%
April80 centsR1.1240%
MayR1.02R1.2017.65%
June98 centsR1.2022.45%
July83 centsR1.0627.71%
August88 centsR1.0418.18%
September95 centsR1.0611.58%
October91 centsR1.1020.88%
NovemberR1.03R1.3833.98%
DecemberR1.35R1.403.7%

Source: Profile Data & Moneyweb

Liquidity risk

These were three of the best-performing shares on the JSE last year, but in all three cases investors had to stomach a great deal of volatility. That comes with the territory when investing in very small companies where trade levels are very low.

What investors should also learn from this is that what these penny stocks are worth is a moving target. The prevailing share price is not necessarily an indication of what you can actually sell them for. From one day to the next, the price at which they change hands can differ substantially.

This is not necessarily a problem if you have the time and patience to wait for your asking price to be met. However, if you own any of these shares and need to sell them in a hurry, you may have to settle for a price well below where they were last sold as there are not that many buyers.

That is the nature of liquidity risk. If you have the ability to sit tight, you can turn it to your favour and earn a premium if there are no other sellers in the market. When there are no buyers, however, it can cost you.

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