Penny stocks are volatile-but-potentially-lucrative investments. And I’ve recently been looking for smaller companies to invest in to complement the larger firms that form the majority of my portfolio.
One business that caught my eye is Iofina (LSE:IOF), which specialises in the exploration and isolation of iodine as well as the production of speciality chemicals. At present, the company’s shares trade for 32p each and it has a market capitalisation just shy of £61m.
Here’s my take on the outlook for this penny stock.
A mineral in demand
Iodine is essential for human health. It plays a vital role in proper thyroid functioning and promoting hormone production for healthy metabolism. It’s estimated that up to a third of people worldwide are at risk of an iodine deficiency.
The price of iodine has risen steadily since early 2020, driven by demand for human health applications and X-ray contrast imaging agents. Analysts expect the market will continue to grow over the coming years.
This is good news for Iofina. The company has developed a method of extracting iodine from leftover brine in onshore oil and gas production. Its process is more environmentally friendly and cheaper than leaching nitrate ores mined from the Atacama Desert, which is the source of around 66% of the world’s iodine supply.
Strong financials
The company’s results for FY22 were encouraging. Revenue increased 8% to $42.2m and its average price per kilogram for sales of crystallised iodine rose 98% to an average of $71.20. In fact, the group saw improvement across a range of key metrics including EBITDA, profits, and cash flow.
In addition, the business also trimmed its net debt from $3m to $0.9m. This is a positive sign, considering Iofina’s balance sheet hasn’t always been this healthy. After rapid expansion in 2013, the share price had collapsed 98% by early 2016, weighed down by large debts and loss-making operations.
Regarding future expansion, the company’s focus is on expanding iodine production and its speciality chemicals business. It aims to develop new chemical compounds, reduce its reliance on its current oil and gas partners, and explore new geographic areas. It currently operates five extraction facilities in the Anadarko Basin in western Oklahoma.
Risks
Of course, Iofina is very exposed to iodine prices. Any turbulence in the market poses a clear risk if the company’s margins are squeezed as a result.
Moreover, although the firm has good relationships with energy companies operating in Oklahoma’s oil fields, there’s a limited number of fields that can be developed in the area. That said, the company isn’t near full capacity currently. Plus, it plans to diversify its revenue sources in the future.
Nonetheless, as things stand, this could potentially curtail long-term growth in the share price.
Why I’d buy this stock
Overall, it looks attractively valued to me and recent financial results have been very positive. If global demand for iodine continues to grow as the company expects, there’s considerable potential for the business to expand.
While I wouldn’t take too large a stake in any penny stock, given their volatile nature, this company could potentially help to boost my portfolio’s returns. If I had spare cash, I’d buy today.
