The returns from investing in the right penny stock can be huge. Yet such stocks can also be very risky. After all, there’s normally a good reason the market values them so lowly. These companies usually have poor fundamentals and slim prospects for near-term profitability.
Still, I do reserve a small portion of my portfolio for exciting moonshots. One penny stock I own is Creo Medical Group (LSE: CREO).
Here are three reasons why I’m bullish on the shares long term.
Innovation
Creo Medical is a British company that develops and commercialises a suite of electrosurgical medical devices. These are used in the field of endoscopic surgery, which involves surgeons using a scope and a flexible tube with a camera and light at the tip.
The firm’s leading product is called Speedboat, which is a minimally invasive surgical device attached to an endoscope. This is used to cut out or vaporise cancerous and pre-cancerous lesions in the digestive tract.
Endoscopes are traditionally only used to diagnose diseases, not treat them. But Creo’s products can dissect, resect, coagulate and inject, all in a single device. They’re powered by advanced types of energy. This Croma Advanced Energy platform — as it’s known — is patented and is already being licensed out to other surgical companies.
The firm also makes money from selling the consumables necessary to continue using its core devices. This razor-and-blades business model is attractive because to me it’s underpinned by predictable, recurring revenue from consumables.
During the first half of 2022, the volume of procedures used with Speedboat internationally doubled over the equivalent period last year. Revenue for 2023 is estimated to grow 20% year on year, to around £33m.
Massive partnership
Earlier in 2022, the company signed a multi-year collaboration with robotics giant Intuitive Surgical. Under the agreement, its products are to be made compatible with Intuitive Surgical’s state-of-the-art robotics technology. A number of milestone payments to Creo Medical have been agreed, as well as royalties for products sold in the future.
This was a massive endorsement for the company’s technology. Then last month, a second robotics licensing deal was signed with Cambridge-based CMR Surgical. Both these deals bode well for future earnings.
Sad statistics
Unfortunately, it’s estimated there will be a 40% rise in new cases of bowel cancer in the next two decades. Existing surgical treatments involve long recovery times, which puts pressure on health systems such as the NHS.
Creo’s advanced energy platform and innovative surgical tools allow for much quicker recovery, reduced hospital stays, and lower recurrence rates. Its technology is a win-win situation for patients and health care providers.
With a market cap of only £72m, the stock might also be a win for patient shareholders too.
Not yet profitable
Creo Medical has only commercialised its products in the last couple of years. And its progress was slowed down during the pandemic. So it’s not a profitable business yet, which probably goes some way to explaining the stock’s 73% decline in 2022.
There’s a strong likelihood that the firm will need to raise more cash soon to fund its next stage of growth. That could send this growth stock lower, depending on the details of the capital raise. Even so, I’m still adding to my position in 2023, possibly before.
