Picked carefully, penny stocks can prove incredibly profitable. One of the biggest challenges, however, is knowing when the smart money has already been made. Today, I’m asking whether this is the case for three of last year’s big winners.
A penny stock that did particularly well in 2021 was car dealership Lookers (LSE: LOOK). Its shares climbed 66% as demand for new and used vehicles from cashed-up drivers outstripped supply. Back in September, the small-cap revealed record first-half numbers. Underlying pre-tax profit rocketing to £50.3m over the six months to 30 June, compared to a loss of £36.5m in 2020.
So what’s the outlook for Lookers? Well, there doesn’t look to be any sign of vehicle demand falling just yet. Used-car prices in December were up 28% on the previous year. A P/E of six also seems very cheap, considering the company’s potential to benefit from the growing popularity of electric vehicles.
Then again, there’s also an argument for saying there will come a point when people simply won’t pay inflated prices and demand will moderate. Margins in this line of work are normally very slim too.
On balance, I think Lookers could still do well next year and I’d still consider taking a small position today. But will it rise another 66%? I doubt it.
e-Therapeutics (LSE: ETX) is another penny stock that’s been in scintillating form this year, rising 157%. Contrast this with the FTSE 100‘s 12% gain and it’s not hard to see why small companies appeal to retail investors.
As impressive as this performance is however, there are a few things that make me cautious. While its technology is clearly useful — allowing scientists to computationally test potential therapeutic interventions and drugs — e-Therapeutics remains unprofitable. That could prove problematic in the event of a major market sell-off. Investors tend to dump ‘jam tomorrow’ businesses first.
Regardless of whether or not a crash happens in 2022, a second thing worth noting is that less than half the company’s shares are actively traded. This illiquidity means it won’t take many transactions to cause violent shifts down as well as up. The former could happen even if e-Therapeutics is in something of a sweet spot, thanks to the pandemic.
Considering the above, I think there are potentially better opportunities in the market this year and I wouldn’t be a buyer of the stock now.
Alaska-focused, Australia-based oil and gas company 88 Energy (LSE: 88E) is a final penny stock that did superbly in 2021, rising 167%. There are multiple reasons for this, including the company’s efforts to improve its balance sheet (through the sale of tax credits) and the gradual increase in the price of crude oil.
Unfortunately, a lack of profits once again leaves me cold. Befitting a company in this space, it’s also worth pointing out that 88 Energy shares have been volatile. The very same shares have traded for a little as 0.41p and as much as 4.7p over the last 12 months. They currently change hands for 1.41p a pop. As such, I can’t see this penny stock appealing to anyone other than speculative investors.
While the shares may continue to rally further in 2022 (most likely to do with drilling activity surrounding its Merlin-2 well), I’m content to watch with interest from the sidelines. As far as my own portfolio is concerned, it’s too hot to handle.