In the last three months, shares in Zanaga Iron Ore (LSE: ZIOC) have risen 225%. That’s a stunning performance which shows that investors are becoming increasingly positive about the prospects for the business. However, could such a sudden rise be followed by an equally fast fall? Or does the stock have the potential to help its investors become millionaires?
Improving outlook
Positive news flow has been the key reason for the rise in the Zanaga share price in recent months. The company announced at the same time as its first-half results that there may be the potential for production in the near term. It is considering a small-scale, early production start-up project. This could transform the company from being an exploration-focused business to also having production capacity. This may help to de-risk the company’s outlook, as well as provide an improved financial outlook due to the revenue that may be generated from the project.
Clearly, there is no certainty that production will commence over the medium term. And the company’s share price in the short run is set to be closely linked to how the potential production angle pans out. However, with the prospects for the iron ore industry having improved in recent months, Zanaga’s potential as a producer and as an exploration company could be significant.
Certainly, its share price is likely to remain volatile. Its small size and uncertain outlook mean that investor sentiment could change rapidly. However, for investors who are less risk-averse and who are upbeat about the prospects for the wider mining sector, it could be a means of adding diversification as well as upbeat capital growth prospects to their portfolios for the long run.
High risks
As mentioned, Zanaga appears to be a relatively high-risk share to own at the present time. Also offering high risks but for a different reason is specialist filtration and environmental technologies group Porvair (LSE: PRV). The company reported a positive trading update on Friday which showed that revenue growth in the year to 30 November was 6%. Underlying revenue growth was 11% overall, 13% in the Microfiltration division and 1% in the Metals Filtration division.
Encouragingly, the company’s earnings are forecast to be ahead of management expectations. This helped to push the shares as much as 9% higher following the release of the trading update. However, they now trade on a price-to-earnings (P/E) ratio of 24, which suggests that they may be overvalued. Furthermore, with earnings due to rise by just 3% in the current year, their price-to-earnings growth (PEG) ratio of 8 seems excessively high.
As such, now may be the right time for investors to avoid Porvair. While its performance from a business perspective may continue to be positive, it lacks a margin of safety. This means that its risk/reward ratio may be unfavourable.
