2 penny stocks this Fool thinks could deliver phenomenal returns!

Penny stocks are a risky but exciting asset class to invest in, prone to wild volatility. Our writer thinks he’s found two with the potential for success.

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Penny stocks are not for everybody. Some find them too risky for their appetite, preferring well-established stocks they know and trust. Others enjoy the opportunity to grab a cheap bargain and make potentially life-changing gains. It all depends on an individual’s investment strategy.

With that in mind, here are two low-cap stocks that I think seem to be on the right trajectory.

Targeting sustainable energy

With a £51.1m market cap and share price of 1.3p, Helium One (LSE:HE1) is very much in penny stock territory. 

As the name suggests, it’s an energy prospecting company that explores and develops sites for helium gas extraction. It currently operates three projects in Tanzania, the largest of which, Rukwa, is developed and almost ready for extraction. The company has a strong focus on sustainability and carries out environmental and social impact assessment (ESIA) studies to help it secure appropriate licensing. 

However, it’s not profitable yet and has been burning through cash quickly. Reports suggest it has around $8.7m left but fortunately, it remains debt-free for now. Over the past year, the share price fell 80% but recently things have improved, with it gaining 30% since early April. 

So are things turning around?

Analysts at Liberum think so. They believe the company is on the verge of tapping “world-class” concentrations of helium at its Itumbula site in Rukwa. The London-based investment bank calculates the shares could be worth as much as 5.3p based on the commercial value of the untapped gas.

Naturally, investing in mining can be risky, particularly when the resource has only been discovered and extraction is yet to begin. Should Helium One succeed, it could spell huge profits for the company. But if its cash runs out before it becomes profitable it could spell disaster.

A niche medical company

With the share price now up to 103p, Diaceutics (LSE:DXRX) is technically a penny stock no more. But with a market value of only £87m, it’s still a very small-cap company. 

It appears to have a good business model of providing sought-after diagnostic testing for the precision medicine industry. Despite its small size, it reportedly works with 21 of the top 30 pharmaceutical companies in the world. As evident on the chart below, it was in high demand during the pandemic but has since struggled to enjoy the same success.

That’s notably the key risk the company faces. It’s in a very niche sector, reliant on sustained demand for specialist medical diagnosis. While it doesn’t appear to have any direct competitors currently, it could be priced out of the market by a leading pharma company. Profit margins are down to 0.03% from 0.8% last year and earnings growth lags behind share price growth –- suggesting lots of speculative buying. 

But despite limited growth in the past five years. the share price has done well recently, up 22% in six months. The company seems to be on the right track. Using a discounted cash flow model, analysts estimate the stock to be 78% undervalued. They’re also very bullish on it too, with the average 12-month price target at £1.67. That’s a 60% increase!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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