There are two penny stocks I’ve been researching at opposite ends of the innovation spectrum.
One is a relatively new company at the cutting edge of international medical research. The other has been in business for 60 years, selling tiles from its large chain of UK stores.
However, each has recently caught my eye due to significant movements in their share prices.
Should I buy one, both, or neither of them?
An innovative approach
Shares in Angle (LSE:AGL) have increased 64% since the start of 2024.
The announcement of a “breakthrough” in trials for its cancer diagnostics tool have helped propel them higher.
In 70% of patients, the company’s technology found cancer mutations in cells that could not be identified from the DNA in the same blood.
There’s little point dwelling on the financial performance of the company as the investment case is built entirely around its future potential.
By 30 June 2023, the company had accumulated losses of £113m. Yet revenue for 2023 is expected to be only £2.2m.
On the plus side, it says it has sufficient cash to see it through until, at least, the first quarter of 2025.
Old-fashioned
By contrast, Topps Tiles (LSE:TPT) stock is down 8%, since 1 January.
Investors didn’t like the trading update that revealed sales for the 13 weeks to 30 December 2023, were 4% lower than a year earlier.
But the company has been growing steadily for several years.
It achieved its 2025 target of a 20% market share two years earlier than planned. It expects this to increase further in 2024.
And its shares are presently yielding a very attractive 7.9%. Each year, it plans to return 67% of earnings to shareholders.
However, rising costs caused its gross margin to fall from 54.8% during its 2022 financial year, to 53%, in 2023. This is something to keep an eye on.
Decision time
Although there are reasons to invest in both, I’m cautious about penny stocks.
For example, I don’t have sufficient expertise to know whether the products of innovative companies, like Angle, are going to be successful.
Its technical reports make for heavy reading.
And if I’m honest, I’d only be buying its shares on a ‘hunch’. That doesn’t feel like a sensible basis for making sound investment decisions.
Also, because what they’re doing is pushing boundaries, the timescales for bringing products to market can slip.
Ironically, with more ‘traditional’ businesses like Topps Tiles, it’s the lack of technological innovation that worries me.
‘Bricks and mortar’ retailing is tough, with the internet radically changing the way people shop.
And consumer tastes can change quickly. I’m not sure the company has the financial strength to cope with a sustained downturn.
Both Angle and Topps Tiles highlight my principal fear about penny stocks, namely, that they will run out of money. With small businesses, there’s an increased risk that any investment I make today will be diluted in the future.
Should either company need to raise funds, they will probably ask their shareholders to buy more shares, rather than increase their borrowings.
If I don’t want to participate in a rights issue, the value of my shareholding will fall. Joining in will require more cash.
As a risk-averse investor, I don’t want to have to face this dilemma.
