I think October can be one of the best times to buy penny stocks. That’s because some investors become more active as they worry about the ‘October Effect.’ Others pay more attention to their portfolios as the good weather turns to rain. And the market also tends to heat up as consumers spend more money in the run up to Christmas.
This all creates volatility, which allows me to go bargain hunting for long-term value plays.
The October Effect
I know that some investors are nervous about the October Effect. It’s the name given to the anticipation that markets might crash during the month. And yes — there’s been some big falls in the past. The Bank Panic in 1907, the Stock Market Crash in 1929, and Black Monday in 1987 all happened in October. More recently, the FTSE All-Share index fell 12% in October 2008. But market data shows that fear of the October Effect is purely psychological. In fact, September is worse for market falls.
However, it’s true that stocks in October are usually more volatile. So short-term investors in penny stocks do sometimes get their fingers burnt. That’s because when it comes to investing in cheaper shares, small movements in price make a huge difference. For example, a UK penny stock costs less than one pound. So if it falls by 10p, it loses more than 10% of its value. But the good news is that long-term investors can buy up penny stocks when they fall on volatility, and wait for them to return to their fair share prices.
The penny stocks I’d buy
Just because there might be heightened market volatility next month doesn’t mean I’ll buy any old reduced share price. But with some research, I like to think I can spot the ones that’ll be best for my portfolio.
With that said, Stagecoach makes sense to me. While the bus company has had a torrid two years, its share price is up 24% in the past month due to a proposed tie-up with National Express. In the short term, it’s going to take time before travel rebounds to pre-pandemic levels. And yes, there’s a petrol shortage to contend with. But long term, if the merger goes ahead, I think the new group could rake in huge profits as the combined businesses see sales grow and costs fall.
My second choice is Fulham Shore, the owner of the Franco Manca and Real Greek restaurant brands. At 18p a share, it’s up 122% since this time last year. I’m not surprised. Competitor brands such as Pizza Express, Zizzi, and Prezzo closed down dozens of stores during the pandemic. But Fulham Shore plans to open 10 new restaurants in 2021, and wants to open 155 more by 2028. And encouragingly, revenues in the three weeks to 5 September were 27% higher than in the same period in 2019.
Obviously, there are risks. The labour shortage is making it harder to fully staff restaurants. Raw ingredients from Italy and Greece are rising in price. And the VAT cut is being scaled back.
But if either penny stock dips, I’ll be tempted to take a position. And my fellow Fools have recently covered plenty of others that will be on my October watchlist as well.
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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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