Buying penny stocks can be a great way to generate market-beating returns. But holding these small-cap shares can be a bumpy ride, too. Even long-term investors like me need to be careful before taking the plunge.
Penny stocks are perhaps best known for their frequent volatility. They trade in extremely low volumes on the London Stock Exchange, leaving them vulnerable to sudden price slumps.
So if I find myself forced to sell up before I intended I could end up making a whopping loss.
Risk vs reward
Penny stocks also tend to be less financially stable than more mature companies with larger market caps. This can compromise their ability to survive tough times and heightens my chances of losing money.
They might not be suitable for risk-averse investors, then. However, this class of UK share has also proven a great way for growth investors to make piles of cash. Here is one I’m thinking of buying for my portfolio next month.
Tech titan
Steady technological progress and changing worker expectations following Covid-19 is hammering demand for office space.
Lawyers Boodle Hatfield note that 1.8m square metres worth of office space disappeared during the year to March 2022. This was the biggest drop since records began more than 20 years ago.
Office suppliers might be losing out from the growth of hybrid and flexible working. But it offers a world of opportunity for IT services business. One of these is Corero Network Security (LSE: CNS).
Orders are soaring
This penny stock provides remote users protection from ‘Distributed Denial-of-Service’ (or DDoS for short) attacks. These types of attacks cause websites to crash by bombarding them with huge amounts of fake traffic.
Orders at Corero are expected to jump between 15% and 25% this year alone, the company advised in October. The emergence of flexible working and the relentless growth of the internet mean that the company could keep racking up new business, too, helped by the huge investment it’s making to scale up.
Market threats
There are a couple of big dangers that investors need to be aware of, though. Firstly, the costs of building out its sales and marketing capabilities are extremely high.
Adjusted EBITDA is tipped to fall to between $1m and $2m in 2022 because of these expendes. This compares with earnings of $4.1m that Corero chalked up last year.
Furthermore, this small-cap share is a small fish compared to most of its rivals. Businesses like Microsoft, Amazon, and IBM have the budgets and the brand recognition to make life hard for smaller operators like this.
The verdict
That said, the rate at which the cybersecurity market is growing means Corero could still prove to be a winning investment.
Analysts at Fortune Business Insights think the global cybersecurity market will enjoy a compound annual growth rate of 13.4% to 2029. By then they think the sector will be worth more than $376bn.
It might be expensive. But I’m encouraged by the investment Corero is making to exploit this opportunity, too. On balance I think this could be a top penny stock to buy for the next decade.
