Some penny stocks have excellent potential for growth in the long term. Despite this growth potential, they also have more risks compared to larger established stocks. I have identified two penny stocks to buy in 2022 for my portfolio.
I would want to buy these soon or early in 2022 as they could offer lucrative returns over the longer term. As the year progresses, their prices could rise higher so I see an opportunity to get in early, while they are cheap and add them to my portfolio.
Definition and risk
Sometimes referred to as penny shares, these are stocks that trade with a share price below £1. The firms also have a market capitalisation of below £100m usually. In most cases, these firms are small, lower-valued businesses. Due to this, there is a higher element of risk involved. The reward can also be higher if things go to plan based on product and services offered and performance.
It is worth noting some of the general risks associated with penny stocks. Firstly, there is usually scare information available about these firms, as they aren’t followed by many research analysts. I like to do lots of research and due diligence before I buy any shares. Often, these shares either simply don’t have enough information out there or it come from sources that I wouldn’t consider credible. This can be a red flag that puts me off.
Next, penny stocks can often have a lack of history due to the fact they are newly formed. I understand past performance is not a guarantee of the future but I review it as a gauge when reviewing investment viability.
Finally, these shares can often have a lack of liquidity meaning they have little cash for the business to invest into product launches, research and development, and other activities. Penny shares can often be victims of stock price manipulation too. This can happen when someone buys a large amount of stock, hypes it up, and then sells it after other investors find it attractive.
Penny stocks to buy #1
Seeing Machines (LSE:SEE) is a tech stock based in Australia. It specialises in artificial intelligence (AI) tech to help reduce transport-related accidents with real world applications. This tech is applied in automotive, rail, aviation, and off road sectors. Seeing Machines has a global presence already and can count some major names among its customers. These include Emirates Airlines and General Motors.
As I write, the Seeing Machines shares are trading for 11p. At this time last year, the shares were trading for 5p, which is a 120% return. I am a fan of tech stocks generally so when a penny stock is on my radar with new and exciting tech applications, I take a good look at it. So far Seeing Machines looks an exciting prospect for such a cheap price. It seems to be using technology to solve a real problem and save lives.
Seeing Machines released year-end results last week, which made for excellent reading. Revenue increased 18% compared to last year and profit increased by 44%. Net cash also increased, which will solidify its balance sheet. Operationally, it reported its tech was now implemented in further General Motor’s models and new strategic deals were close to being signed off with other manufacturers of transport modes. This will boost performance in 2022.
Seeing Machines also has a decent track record of performance. I can see that revenue and profit have been increasing year on year for the past four years.
All penny stocks have risks. Seeing Machines could be out-muscled by larger tech firms that might decide enter the same space, despite its good progress to date. Furthermore, share prices can be volatile for small caps. Seeing Machines is trading close to all-time highs, so any negative news could cause a major shock to the share price.
Overall I would happily add Seeing Machines shares to my portfolio for 2022. I believe it is an exciting company at a cheap price with some excellent fundamentals to date behind it. I wouldn’t be surprised to see the share price continue to climb in 2022.
Zephyr Energy (LSE:ZPHR) is an investment platform designed to undertake economically attractive gas and oil projects. It is designed to focus on developments in the Rocky Mountain region of the US. Zephyr was formed by individuals with lots of experience in the gas and oil industry.
Part of my bullish stance on Zephyr stems from oil and gas demand. The demand for both is high right now and a small cap like Zephyr could capitalise. Oil demand may be declining in the very long term but for now there is lots of demand, especially as the world recovers from the pandemic.
As I write, shares in Zephyr are trading for just over 6p. A year ago shares were trading for less than a penny, at 0.63p. That equates to a return of over 800%. Penny stocks can often experience huge share price increases in a short space of time so I am not getting too excited.
This year has been a particularly fruitful one for Zephyr. A re-brand and new management team have renewed focus and strategy since 2020. It has also made significant drilling progress in some of its prominent sites, especially one in Utah for which it has a lot of expectations. At the site drilling operations had been completed, it hit primary and secondary targets, and there were signs of natural gases and oil. A further update since points to the finalisation of well design so things are looking good.
Zephyr does come with risks. Like Seeing Machines, it is a very small fish in a large pond and could easily be out muscled and outmanoeuvred by a larger firm if they entered the same space geographically. Finally, Zephyr’s progress is based on projections to date rather than tangible results, which is a credible threat to any investor returns.
Overall, for 6p per share, I would happily add a small amount of shares to my portfolio. I would expect the share price to rise in 2022 and beyond. I believe my investment could grow and offer me a return in the long term, especially if some current projects begin to yield tangible results by way of oil and gas.
Jabran Khan 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.