A penny stock is a company that has a market cap below £100m and a share price below 100p. I always keep an eye out for stocks in this category, as they can see explosive growth in the future. Yet their high-risk nature can deter some investors. Here’s one idea I recently spotted that has become a penny stock due to a sharp decline in the share price.
Details worth noting
I’m talking about Jubliee Metals (LSE:JLP). The company operates an interesting business model, specialising in recovering and processing metals. It takes metals such as copper, chrome, and platinum group metals from low-cost feedstocks, including overlooked mining waste. Using modular processing units placed near sites in South Africa and Zambia, Jubilee can quickly scale operations and turn waste into high-grade concentrate for sale or further refining.
The company’s market cap is now £94m, indicating it has fallen into penny stock territory. It hasn’t always been this way, but the 45% drop in the stock over the past year has tipped the scales. Part of the decline has stemmed from disappointing financial results, with rising operating costs and increasing finance expenses eroding overall profitability.
Another factor has been weaker commodity prices, particularly in copper this year. The company is exposed to the volatile swings in these prices, which ultimately mean revenue takes a hit when it has to sell at the prevailing market price. This has also led to negative investor sentiment surrounding the company and remains a risk going forward.
Reasons for optimism
Despite these problems, I think the stock could be a smart value play right now. While profits have been squeezed by weaker commodity prices and rising costs, these challenges appear cyclical rather than structural. This means profit margins should recover as commodity markets stabilise.
Importantly, Jubilee’s diversified revenue base across different metals reduces reliance on any single one. With expansion projects in Zambia ramping up and capital raised to fund future growth, the company has the potential to deliver significantly higher earnings once commodity prices firm.
In late spring, the company announced strong year-on-year growth in output. The higher production means it should exceed the original targets for the full year. Even if commodity prices don’t recover quickly, the increase in output should still allow revenue to grow.
Managing the risk
I’m not going to pretend that this is a low-risk stock. However, I can look to diversify some of the risk away in my portfolio. For example, I’d consider only adding a small amount of money to the company, relative to the rest of my portfolio. Further, by including it alongside my existing broad range of holdings, I’m not solely owning this as my only exposure to the stock market.
On balance, I do think the company could rally back in the coming year, so am seriously thinking about adding it to my portfolio.
