Can penny stocks make me rich? Maybe. But they’re risky because of the smaller size of the underlying businesses. So, before buying, thorough research is even more important than ever.
What is a penny stock, exactly? I like the definition that it’s a company with a market capitalisation under £100m and a share price below £1.
However, that knocks out a few promising candidates because their share prices happen to be above £1, despite having market capitalisations below £100m.
On top of that, I’m ignoring companies with a market capitalisation below £50m – they’re too small for me.
Sifting through the rubbish
The first question I’d ask, is why is the company a penny stock?
Sometimes firms end up with penny-stock status after shrinking from being larger businesses. In most cases, shareholders will have endured a grim time. So I’d avoid those because the best we can hope for is a turnaround in fortunes.
But why bet on that scenario after a business has just demonstrated its tendency to underperform?
Good examples of such laggards can be found in digital clothing and footwear retailer N Brown and oil and gas company Pharos Energy.
Another breed of penny stock is the purely speculative business with little or no meaningful earnings, and sometimes scant revenue and cash flow as well. I’d avoid those too.
Good examples include commodity businesses like Premier African Minerals, Chariot and Predator Oil & Gas Holdings. There are also tech stocks like Cirata, and pharmaceuticals such as Scancell Holdings and Futura Medical. We can even find such firms in the financial space, like Argo Blockchain.
One thing those speculatives have in common is that they’re all bargepole-jobs for me.
Penny stocks I like
However, there are some penny stocks I’m keen on right now. For me, small companies are all about growth in earnings. With that in mind, I like the way the turnaround is unfolding at RM.
It’s a UK-based global educational technology (EdTech), digital learning and assessment solution provider. The business went through a difficult patch but earnings are rebounding. The company looks well worth further and deeper research now.
But the one penny stock I’d consider buying now more than any other is Corero Network Security (LSE: CNS). The tech company offers Distributed Denial of Service (DDoS) protection solutions.
It specialises in automatic detection and protection solutions with network visibility, analytics, and reporting tools. The technology aims to protect against external and internal DDoS threats in complex edge and subscriber environments, thus ensuring internet service availability.
That’s quite a mouthful, but the business looks set to explode into earnings after being a loss-maker for years. So that’s the important bit.
In April, the company updated the market by declaring a strong start to 2024 with greater than $8m of orders secured “already”.
The directors said “significant” new and existing customer wins underpinned the positive sales traction.
As I mentioned, penny stocks are risky, and trends in the underlying business can reverse suddenly. It’s easy to lose money on stocks like this. It’s not an investment I’d tell my mum about!
Nevertheless, I like the net cash position on the balance sheet and the bullish tone of recent updates. For me, this is definitely a stock to consider now.
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Kevin Godbold 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.
