Penny stocks can produce huge returns, at times. However, they can also fail spectacularly because they tend to be higher-risk, speculative investments.
Here, I’m going to take a look at two penny shares that are flying right now, Rainbow Rare Earths (LSE: RBW) and Gulf Marine Services (LSE: GMS). Should I buy these growth stocks for my portfolio?
A renewable energy play
Rainbow Rare Earths is a small mining company focused on producing rare earth oxides to drive the green energy transition. Its projects include the Phalaborwa Project in South Africa and the Gakara Project in Burundi. Trading for around 13p, it currently has a market-cap of about £80m.
Now, I can certainly see some reasons to be bullish here. Rainbow’s two key products are both rich in the four most economically important rare earths – neodymium and praseodymium (NdPr), dysprosium (Dy), and terbium (Tb). These are crucial inputs in electric vehicles, renewable energy technologies (eg wind turbines), smart phones, and robotics.
Meanwhile, the company has signed some big deals lately. Last month, for example, it entered into a Memorandum of Understanding (MoU) with potash giant The Mosaic Company to conduct a preliminary economic assessment on extraction of rare earths from a phosphogypsum stack in Brazil.
Ultimately though, this stock is just a bit too speculative for me. At present, the company has minimal revenues and no profits. And it looks like it only has enough cash to last until 2024, meaning it may have to raise capital at some point in the near future (which could negatively impact the share price).
So I won’t be buying the shares for now.
Significantly undervalued?
Turning to Gulf Marine Services it operates a modern fleet of liftboats (self-propelled, self-elevating vessels that are used in various offshore exploration and production activities) used across the oil & gas, renewables, and platform maintenance industries. It currently trades for around 8.5p and has a market-cap of approximately £86m.
There are a number of things to like about GMS, in my view. For starters, it’s profitable. This year, the company is expected to generate earnings per share of 1.6 cents on revenues of $142m.
Secondly, it recently said market demand for its services remains strong. It noted that it started 2023 with a backlog ‘not seen for many years’ ($369m).
Third, the company is aggressively paying down debt in an effort to strengthen its balance sheet. It also recently announced a decrease in finance charges.
Now, this stock does look quite interesting from a value perspective. If the earnings forecast above is accurate (and it may not be), this company could be undervalued.
At its current share price, GMS has a forward-looking price-to-earnings (P/E) ratio of less than seven. That’s about half the UK market average.
One thing that puts me off here however, is the fact that leverage is still quite high. At the end of 2022, net debt stood at $315.9m. In a world of higher interest rates, this adds risk.
In light of this large debt pile, I think there are better (and safer) growth stocks to buy today.
