In most cases, penny stocks often leave investors with little left of their original investments. That’s because these tiny businesses have enormous amounts to prove with limited financial and physical resources. As such, the vast majority fail and tumble into obscurity. But every once in a while, a diamond in the rough seemingly emerges. And investors can end up reaping gargantuan returns.
That certainly seems to be the case for Powerhouse Energy (LSE:PHE) of late. In the last 12 months, the penny stock’s up a whopping 192%! What happened? And is this company on track to continue delivering explosive returns in the long run? Let’s take a closer look.
The patent war’s over – Powerhouse won
As a quick reminder, this small enterprise is exploring opportunities within the alternative energy market. Its technology allows it to process and convert unrecyclable waste into fuel, electricity, energy, and high-grade hydrogen, among others.
Needless to say, with the impact of climate change becoming ever more apparent, such solutions are rising in demand. And it certainly explains the high level of investor interest in this business. Even more so now that the company’s just won its legal dispute with Onunda Ltd.
Last October, Onunda filed a claim against Powerhouse Energy in the London High Courts regarding the group’s recently submitted European Patent. That’s obviously concerning, given prolonged legal battles are both distracting and expensive, especially if Powerhouse were found to be in the wrong.
Yet, despite justifiable concerns from investors, it seems management was spot on when they described the claim as “entirely without merit and vexatious”. Why? Because earlier in May this year, the matter was resolved, with Onunda barred from bringing any further challenge against Powerhouse’s patents.
With this headache out of the way, the firm’s returning all of its attention back towards its promising R&D projects. So it’s no surprise to see the penny stock surge on this news.
Time to buy?
Despite shares trading at around 2p, the firm’s market capitalisation is close to emerging out of penny stock territory. Today, it stands at roughly £80m, quickly approaching the £100m threshold of becoming a small-cap. But can this upward momentum continue? After all, it’s reached as high as 11p in the past. And a return to this level represents a potential 450% return!
Personally, I think investors ought to adopt some healthy scepticism. There’s no denying the group’s technology has a potentially highly lucrative future. In fact, the UK waste-to-energy market’s estimated to be worth over £1.7bn today, indicating that Powerhouse has barely scratched the surface of its market opportunity.
But there’s still a giant question mark as to whether management has the know-how or resources to get it there. It’s important to note that this company doesn’t even have a revenue stream yet, and it’s bleeding through a lot of cash.
As of June 2023, there’s around £4.4m of liquidity in its bank account. That’s enough to cover its short-term liabilities. But once the group starts to ramp up operations, a lot more money’s going to be needed. Given its weak financial position, that likely means shareholders will be getting diluted as the group issues new shares.
Right now, this penny looks more like a gamble than an investment. At least, that’s what I think.
