Insider Monkey

15 Penny Stocks with Biggest Upside

Fahad Saleem
9 min read

In This Article:

In this article, we will take a look at the 15 penny stocks with biggest upside. To see more such companies, go directly to 5 Penny Stocks with Biggest Upside.

Everyone wants to find stocks with upside. But the stock market turmoil that started back in 2022 amid rising inflation and interest rate hikes has shown the importance of managing risks and investing wisely in stocks for the long term. Value investors like Warren Buffett and Howard Marks time and again talk about the concept of downside protection, emphasizing that one of the biggest goals during investing should be not to lose money. A 2016 report entitled “The Upside of Less Downside” by Alliance Bernstein talks about a similar concept. The report said that at the time that the fear of losing money is rapidly increasing worldwide amid changing demographics. As global population begins to age, people are hesitant to take risks and put large amounts of money in equities because they don’t want to lose their safety nets during retirement. The report then talks about a 90/70 upside/downside portfolio and says:

“Imagine a hypothetical global stock portfolio that captured 90% of every market rally and fell only 70% as much as the market during every sell-off. What would the long-term returns of this portfolio look like? You’d be forgiven if you thought it would underperform. It wouldn’t.”

"Smoother Ride" Portfolio

The report calls the portfolio of upside/downside protection as “smoother ride” portfolio. The report analyzes a hypothetical portfolio based on this strategy and says that the portfolio would build capital of nearly US$13,000 over the period examined. The examined period spanned over 40 years through the end of June.

The report however points out some caveats and challenges of having a 90%/70% upside/downside spread approach. First, it’s not easy at all to stick to such a portfolio especially when markets are rising. Investing in low-risk stocks means you are missing out on stock returns when the overall market is in euphoria. But the true mettle of this portfolio is visible during tough times, when markets are down and the downside protected, low risk portfolio is outperforming the market. The report also said that finding low-risk stocks is not easy. While Alliance Bernstein said it believes in investing in resilient companies with strong business models and attractive prices, the firm acknowledged that it’s easier said than done. The report also mentions some data on why investing in low-risk stocks makes sense.

“Research going back to the early 1970s shows that lower-risk stocks, as measured by beta, performed much better than the CAPM would predict. By focusing on absolute risk (a.k.a. the Sharpe ratio), the long-term returns of strategies with less volatile stocks have matched or outperformed the market and more aggressive equity strategies over four decades. Based on Sharpe ratios, lower-risk stocks have delivered significantly more return per unit of risk.”

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