Investing in penny stocks isn’t for the risk-averse. They’re often sensitive to any piece of market news and there’s low liquidity. This means they can be extremely volatile, with sudden movements one way or the other. On the other hand, finding the right penny stock can be a very rewarding activity.
Here’s why I think this small-capitalised company has enriching potential at 27p.
Volatile stock
Creo Medical (LSE: CREO) shares epitomise volatility. After going public at 77p in 2016, the stock proceeded to double within two years. Then it went up and down for three years, before plunging all the way down to 18p. Now the shares are at 27p, having rocketed 42% in the past month.
The stock lost over 80% of its value in 2022. The reason was fear about the company’s dwindling cash reserves. However, last month the firm announced that an oversubscribed fundraise had brought in £28.5m. And there’s the potential for an extra £5.2m from an open offer of stock.
Craig Gulliford, CEO of Creo, said: “This funding round will not only provide us with the working capital to accelerate the roll out of our core technology, but will also resolve the funding gap to provide us with a pathway to being cash flow breakeven and, ultimately, to profitability.”
This fresh injection of capital into the business has now removed liquidity concerns. Investors can instead focus on the market opportunity ahead, which I believe is substantial.
Cutting-edge technology
The company has developed a suite of minimally-invasive electrosurgical devices. All six of its products have been CE marked and five are also cleared for use in the US.
Its flagship product is called Speedboat. This device can be attached to an endoscope to cut out or vaporise pre-cancerous growths in the digestive tract before they spread. Endoscopes are normally used to investigate rather than perform treatments, so this innovation benefits patients and ultimately saves healthcare systems money.
Creo’s devices are powered by an advanced energy platform called CROMA. Importantly, the firm has started to licence this patented technology to other companies, including global robotics giant Intuitive Surgical. The company has already received its first income from this non-exclusive licensing deal (around £1.4m), and expects additional milestone payments, as well as growing device sales revenue.
These intellectual property deals with Intuitive is a huge endorsement of Creo’s technology, and the company expects to announce more such licensing deals in the future.
The stock
Analysts expect the firm to post £27m in sales for fiscal 2022. That’s from basically nothing in fiscal 2019, when its devices first started generating revenue. But the company is still loss-making, and the risk is that it remains so. At the very least, it will have to significantly increase sales next year to justify its current £56m market cap.
However, the stock’s price-to-sales (P/S) ratio of two doesn’t look too demanding. And with cash no longer an issue, most analysts believe the company has a clear path towards being cash generative in 2025.
Overall, I think the stock has immense long-term potential. That’s why I recently topped up my holding.
