Finding the right penny stock can turbocharge returns. Just look at Defence Holdings, a small-cap that’s developing AI-enabled software defence systems. It’s up 4,380% in one year!
In reality though, successful penny stocks are rare beasts, and this type of eye-popping return is rarer still. But for investors with a high risk tolerance, it may be worth digging into businesses operating in growth markets with untapped future potential.
Cellular agriculture
Agronomics (LSE:ANIC) certainly falls into this category. It’s a venture capital company focused on the nascent fields of cellular agriculture and precision fermentation.
This area is often called ‘clean food’ or ‘cultivated meat’, as it involves growing animal products directly from cells instead of raising whole animals.
So far, Agronomics has invested in more than 20 start-ups. These include SuperMeat (cultivated chicken), BlueNalu (cultivated seafood), Meatable (cultivated pork and beef), and VitroLabs (cultivated leather).
Of course, these names will be obscure to most investors, as they’re still largely early-stage. However, some are starting to commercialise their products and services.
Last month, for example, portfolio holding Clean Food Group received regulatory approval for its CLEAN Oil 25 to be used as a cosmetic ingredient in the UK, US, and Europe. Clean Foods manufactures sustainable oils and fats through fermentation.
Developed in collaboration with THG LABS and Croda International, this breakthrough product is a sustainable alternative to conventional oil ingredients in the skincare, haircare, and wider personal care categories (all massive markets).
Palm oil is used in around 70% of cosmetic products, and it remains one of the leading drivers of tropical deforestation. For decades, the beauty industry has faced a difficult challenge, aware of the damage caused by palm oil, but unable to replace it due to its unique properties. Today, that changes with this new regulatory approval.
Jim Mellon, Executive Chair of Agronomics.
Big discount
Significant commercial progress like this should start to drive portfolio returns. To date, Agronomics has invested a total of £1.6m into Clean Food Group. Subject to audit, the firm says this is currently carried at £6.9m, representing a significant uplift.
The position represents around 4.8% of Agronomics’ last stated net asset value (NAV), as calculated in June. That was 14.4p per share, which suggests the shares at just under 7p are trading at more than a 50% discount to NAV.
Higher broker forecast
It goes without saying that this stock is very much in the high-risk, high-reward camp. There’s no guarantee these start-ups will ever find commercial success, while a consumer backlash against lab-grown food could torpedo investor sentiment (and funding) for the sector.
Also, while NAV gives a rough idea of value, calculating it is hardly an exact science. Agronomics’ holdings are all private, so their valuations only get updated periodically.
Nevertheless, this steep discount to NAV likely underpins the stock’s far higher broker price targets. The two analysts covering Agronomics currently have a median 12-month target of 14.9p.
That’s a whopping 113% above the current share price!
According to Agronomics, precision fermentation, biomass fermentation, and cultivated meat technologies represent a $200bn+ market opportunity by 2040.
Agronomics gives investors rare exposure to the ground floor of a potentially transformative industry. For those with a stomach for high risk and volatility, I think this 7p penny stock is well worth checking out.
