When it comes to penny shares, I’m not looking to invest in the very smallest, riskiest companies. For me, the chance of losing all my money is off-putting. Instead, I’m looking for companies that have a share price under 100p per share, hence they’re ‘penny shares’ and have significant potential for growth.
A beneficiary of Covid
One such penny share could be Open Orphan (LSE: ORPH). It says it’s a “world leader in the testing of vaccines and antivirals through the use of human challenge clinical trials.” It provides services to large pharmaceutical companies to assist clinical trials.
The vaccine development market is expanding considerably as a result of Covid-19, so there’s potential for years of growth. Another positive is that the executive chairman owns just over 6% of the shares, which is a sizeable holding in a public company. He’s a co-founder, but I still find that amount of ‘skin in the game’ reassuring.
Open Orphan was granted a £40m contract by the UK Government, showing there’s significant demand for its services.
Disposals could generate significant value. Open Orphan plans to spin off at least four major assets as separate companies. These include selling its novel disease data platform Disease in Motion to wearables giants like Fitbit. The company seems to have many strings to its bow.
That said, I’d be wary of investing too much in Open Orphan because it’s a small biotech company, making it inherently risky. And there’s a valuation risk. In just a year, the shares have gone up 400%. Also, the conditions that the company expects going forward (an increased focus on pandemics) may actually recede and lessen demand for its services.
Another penny share with plenty of potential
DX plc (LSE: DX) is a courier and logistics company. For the 27 weeks ended 2 January 2021 the financials look strong. Revenue and cash flow were both strongly up, while net debt fell. Net cash at the end of the period was £14.1m.
The chief executive has led other successful logistics businesses. That’s a good sign I think. He co-founded Nightfreight plc, a logistics company and has been involved in the industry for 45 years so should be able to help the logistics group grow. He’s also previously worked with the current DX chairman at another business, so they know each other well.
Possible downsides to investing in DX Group
On the downside, the balance sheet doesn’t seem in the best of shape with current liabilities higher than current assets, which may weaken its working capital. This is the opposite of what I want to see in an investment.
For example, payables increased dramatically between the ned of 2019 and the start of 2021, which may make strong growth harder to come by. These bills, due to be paid in the next 12 months, total over £38m. That’s only £4.8m less than the total current assets (assets that will convert into cash within the next year).
Yet its investment in things like new depots and technology has helped it win new business. That makes me think DX Group could do well going forward. It’s a cash-generative business, which is also good for shareholders. If the balance sheet improves, it could do very well, in my opinion. I’m monitoring the company and may add this penny share to my own portfolio.
Andy Ross owns no share 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.