Despite the risks, I don’t mind adding the odd penny stock to my portfolio. But I tend to stay away from pre-revenue miners with assets in far-flung republics. They’re a bit too dicey for my own risk tolerance.
However, there’s a small-cap stock trading for 27p that I’ve been building a holding for over a year now. It’s up 170% since the start of 2023.
But hang on a minute…why do I say ex-penny stock if I can buy it for pennies? Well, as the name implies, the stock is placed into the “penny” category if it has a share price of less than £1. However, it would also typically need a market capitalisation under £100m.
So, though hVIVO (LSE: HVO) is trading at 27p, its market cap is £183m, making it a former penny stock.
Anyway, here’s why I’m bullish on this small-cap share.
What does it do?
The company is a world leader in testing infectious and respiratory disease products using human
challenge clinical trials. These expose some healthy volunteers to pathogens to study disease progression and test vaccine efficacy.
While that sounds dangerous, hVIVO is an expert in running these trials and recruits volunteers through its popular FluCamp. It also offers clinical consultancy services via its Venn Life Sciences business.
My mate has done some of these trials and gets paid rather well. Indeed, he keeps trying to persuade me to do one (I suspect there’s a referral bonus).
But while I like the idea of getting paid to sit for days and finally tackle Tolstoy’s War and Peace, I view them like those small miners in far-flung republics. They’re just out of my comfort zone, and I don’t want to risk any fever dreams.
A profitable small cap
In 2024, the company expects to generate revenue of £62m, an increase of 10.7% over last year. By 2028, however, it is targeting revenue of £100m per year. So this is a high-growth company.
What I like here though is that the firm is already posting profits. Last year, its EBITDA profit margin expanded to around 22% from 18.7% in 2022.
This increasingly healthy financial position even enabled it to start paying dividends.
Meanwhile, the firm had a cash position of £37m at the end of 2023, with no debt. And it’s set to open a new state-of-the-art facility in Canary Wharf, London, in the first half of this year to facilitate its growth.
A potential hidden gem
Looking ahead, 90% of this year’s revenue guidance is already contracted, with good revenue visibility into 2025. Therefore, it wouldn’t surprise me if guidance is raised as more contracts are (potentially) signed.
In fact, I think it’s likely. After all, human challenge trials can save its clients – some of the world’s top biopharmaceutical companies – time and money. That’s an important selling point in today’s budget-constrained world.
Still, this is a small-cap stock. So volatility is a given. In February, the share price fell 10% after some directors sold shares to help meet demand from institutional investors.
Finally, I think the valuation here is attractive, with the shares trading at around 19 times forward earnings. That could end up looking very cheap by 2028. I’d invest in March with any spare cash.
