2 Penny shares I’d avoid like the plague

Penny shares can deliver enormous returns for investors willing to take on additional risk, but not all of them are gems.

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The land of penny shares is fraught with risk. That’s because these businesses are often tiny for a very good reason. But every once in a while, a gem in a sea of mediocrity turns up, delivering extraordinary returns for investors.

Unfortunately, finding such opportunities is pretty rare. And there are plenty of occasions where one seems to have appeared but later turns out to be a dud.

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With that in mind, let’s explore two penny shares I’m personally not going near.

Phase 1 cancer trials

Avacta (LSE:AVCT) received a lot of attention in 2020 for the young biotech’s participation in the fight against Covid-19. Using its proprietary Affimer proteins, lateral flow tests were rolled out to help detect and reduce the spread of the virus. But cancer research is actually at the core of this firm’s agenda. And its new AVA6000 chemotherapy treatment is driving a lot of excitement.

Unlike existing chemotherapy treatments on the market today, AVA6000 is highly targeted, only affecting tumour cells with a specific protein concentration. That means less collateral damage to healthy cells, reducing the horrible side effects for patients.

This certainly sounds promising as penny shares go. So what’s wrong with it?

AVA6000 is still in Phase 1 clinical trials. It could be up to a decade before the treatment makes it to market, assuming the trials are successful. But, on average, less than 10% of Phase 1 drugs make it past the regulators. And that doesn’t include the problems with financial viability even if approval is given.

These aren’t exactly welcoming odds. And if AVA6000 fails, the stock price could quickly plummet. Hence why I’m not tempted to start adding some shares of this penny stock to my portfolio today.

Mining Bitcoin with penny shares

With the spiking prices of cryptocurrencies last year, shares of the penny stock Argo Blockchain (LSE:ARB) skyrocketed. But since then, both crypto and Argo have seen their prices plummet. The future of digital currencies remains uncertain. And while there are several practical uses for the technology, many individuals like myself remain unconvinced.

Regardless, I can’t deny this business has made remarkable progress over the last 12 months. Excluding the recent dip in Bitcoin production due to weather conditions. Profit margins stand at an impressive 80%+! Meanwhile, the construction of its new mining facility in Texas is proceeding on schedule. Overall, things seem to be moving in the right direction.

Having said that, like many penny shares, there is an ocean of uncertainty surrounding the long-term viability of this business. With regulators starting to clamp down on cryptocurrencies, prices could be in for quite a tumble. With the fate of this business seemingly beyond the management team’s control, it doesn’t sound like an enticing proposition for my portfolio.

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Zaven Boyrazian 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.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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