Penny stocks offer an interesting investment opportunity. There’s often confusion among newer investors on what exactly constitutes a penny stock. This is often because the definitions are different in the UK and the US, and most investors buy shares in both markets to diversify their risk.
In the UK, penny stocks are shares that cost less than one pound and which have market caps of under £100m. They are generally listed on the FTSE Alternative Investment Market (AIM). In the US, they are shares that cost less than $5 with a market cap of less than $300m.
Penny stock success
The small scale nature of penny stocks mean that they are generally fairly risky. One of their hallmarks is that the company issuing them often hasn’t yet fully developed their product or service, and consequently are unlikely to be generating much profit or revenue.
Of course, the advantage is that they have plenty of room for growth – and sometimes, this can be explosive. It’s also worth remembering that many blue chip stocks started out as penny stocks.
Famous examples include Apple (NASDAQ: AAPL), which traded under a dollar a share in 2003, and is now the most valuable company in the world. Its market cap of $2.5trn is worth more than the entire UK FTSE 100. Or Amazon (NASDAW: AMZN), which initially traded for two dollars a share in 1997. Its current share price is $3,421.
A more recent example is Workhorse Group (NASDAQ: WKHS), which was under a dollar a share in mid-2019, and now trades at $9 two years later.
Penny stock potential
Premier African Minerals (LSE: PREM) is a mining company that is developing operations all over Africa. It owns 49% of the RHA Tungsten mine, and has interests in the Otjozondu Manganese Mining Project in Namibia, and the Danakil Potash Project in Ethiopia.
The company has a solid track record in creating wealth from mining exploration; board member Stephen Dattels was a co-founder of UraMin, a uranium miner that sold for $2.5bn in 2007.
The penny stock recently won a three-year exclusive prospecting order (EPO) in Zimbabwe over the Zulu lithium claims. Premier African Minerals believes these claims could constitute the largest undeveloped lithium mine in Zimbabwe. CEO George Roach said that “our exploration teams are appointed, airborne geophysics and other remote sensing has been commissioned, and we have high expectations for lithium, caesium and tantalum pegmatite discovery.”
Two weeks ago, it announced that it would reduce funding to the RHA mine to concentrate on the Zulu project, and issued 500m new shares at 0.20p each. The miner said that it planned to use the £1m raised on developing the new operation. The company estimates initial returns of between $207m and $377m. Roach commented that the company is “well positioned to ride this wave of interest.”
At 0.18p today, I think its share price could rise sharply if the Zulu project takes off. But there’s no guarantee that it will. Mining exploration is fraught with setbacks and risk. Long-term profitability is a long way off.
Its share price hit an all time low of 0.02p four years ago, and this could happen again. However, based on my personal cost-benefit analysis, it’s a penny stock I’d buy today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon and Apple. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. 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.