A rising star in gene therapy?

OXB (LSE:OXB) isn’t a commonly discussed company in the world of pharmaceuticals. Yet it lists many of today’s industry titans as its customers, including AstraZeneca, Bristol Myers Squibb, Novartis and Sanofi, among others.

The business has undergone a bit of restructuring in recent years, refocusing its operation on becoming a contract development and manufacturing organisation (CDMO). And looking at its latest results, this shift in strategy’s seemingly yielding terrific results.

Revenue in 2024 surged by 44% to £128.8m, with operations even becoming profitable in the second half of last year (on an EBITDA basis) for the first time since the post-pandemic boom in 2021. Demand for its services remains strong, with contracted client orders reaching £186m, and management expects the bottom line to reach the black later this year with 20% EBITDA margins.

Of course, this isn’t a risk-free enterprise. OXB’s highly dependent on a few key customers (Novartis, AstraZeneca, and Boehringer Ingelheim), which could compromise cash flows if one of these decides to cut ties. Similarly, operating in the biotech sector comes with its own set of regulatory threats and hurdles that can jeopardise long-term growth.

Nevertheless, with the progress made so far, OXB’s a UK share investors may want to mull.

Opportunities in electronics

Two other businesses with promising potential, in my opinion, are Filtronic (LSE:FTC) and Solid State (LSE:SOLI). Both specialise in electronic components used in a variety of applications.

Filtronic specialises in RF telecommunications, which is essential to the aerospace, defence, and space exploration industry. Solid State also has a portfolio of electronic telecommunications components that serve the defence sector. However, it also has more diversified offerings for the industrial sector through numerous industry-recognised brands such as Custom Power, Solsta, Active Silicon and Durakool, among others.

There’s some overlap between these businesses. Yet the electronics sector’s sufficiently large enough for multiple winners. And with European defence spending on the rise, both companies have enjoyed a sudden uptick in customer orders.

Of course, there are always risks to consider. Just like OXB, Filtronic’s revenue is largely dependent on SpaceX as a key customer. Meanwhile, with notable defence contracts driving its sales, Solid State’s somewhat at the mercy of political cycles as well as industrial and defence budgets.

Having said that, both firms still have promising long-term potential, which makes them worthy of further research, in my opinion.

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However, while most of the attention is being put on electric vehicle manufacturers, investors are seemingly overlooking key suppliers like Solid State (LSE:SOLI). At a market cap of £137m, the electronics component manufacturer has recently surpassed the £100m penny stock upper threshold. Yet it remains firmly within small-cap territory, at least for now.

A future leader in EV components?

After a series of bolt-on acquisitions, Solid State’s product portfolio has expanded. And it now contains globally recognised branded components such as Durakool relays, contactors, and sensors. These are fairly specialised. But they’re a critical piece of the drive, lighting, battery, and steering system in modern-day EVs.

So, it’s no surprise that demand for these components has been rapidly rising over the years – a trend that’s expected to continue. Obviously, that’s a powerful medium-term tailwind. And it could also help the business diversify itself away from solely relying on cyclical defence contracts with BAE Systems and others to drive growth.

In the meantime, business is booming. Demand for Solid State’s communication equipment solutions from the defence sector has been rising as, tragically, more conflicts have broken out.

So, despite inventory destocking headwinds plaguing most of the electronics sector, the group’s sales and earnings are growing at a record pace. Looking at its latest results, sales between March 2023 and 2024 surged by 29%, reaching £163.3m, with pre-profits landing 44% higher at £15.6m.

What could go wrong?

As with every promising investment, there are always risks to consider. This is especially true when it comes to near penny-stock small-caps.

Beyond the threat of general share price volatility, Solid State has quite a few challenges to overcome. Management has been busy investing in expanding the group’s manufacturing capacity to keep up with demand. However, should demand start to drop off, this investment may end up backfiring, putting pressure on margins.

At the same time, Solid State isn’t the only supplier of electronic components and systems to the EV or defence sectors. There are far larger competitors it has to fend off, many of which have far deeper pockets. Now that the firm is starting to make waves, defending and expanding its market share is likely to become far more difficult moving forward.

Nevertheless, this business is developing a habit of defying expectations. And at a price-to-earnings ratio of just 15, the stock is looking relatively cheap considering the growth potential that lies ahead. That’s why I’m considering snapping up some shares for my own portfolio once I have more capital to hand.

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The bull case

As a quick reminder, Solid State is an electronics designer and manufacturer. Operating through a variety of brands, its products include power systems, displays, computing chips, and radio systems, among others used throughout multiple industrial industries like manufacturing and automobiles.

However, management has also been positioning itself within the defence sector, forming relationships with multiple NATO agencies as well as leading industry titans like BAE Systems. This decision has been terrific news for shareholders in recent years.

While the conflict in Ukraine and Gaza is undeniably tragic, it’s triggered a surge in defence spending by multiple countries, including the UK and US. As such, demand has surged. And as a supplier of defensive communication equipment, the firm has seen its top line take off.

The group’s latest interim results revealed a 48% jump in revenue from £59.4m to £88.1m. A large chunk of this growth originated from £23.4m of new NATO contracts, which may be the first of many if Solid State can keep up with customer expectations.

In the meantime, it sent the group’s net operating cash flows through the roof from £0.5m to £8.3m – a 1,560% surge! Needless to say, this provides far more financial flexibility for internal reinvestment as well as shareholder payouts. So, it’s no surprise that management has hiked dividends for its third consecutive year.

Every investment carries risk

While geopolitical conflict is proving good for business, most governments and society in general are pushing for a swift resolution. When peace finally returns to these troubled regions, defence spending isn’t likely to disappear, but growth will probably slow.

This cyclicality will undoubtedly have a noticeable impact on Solid State. And with the shares currently priced at around 20 times earnings, any slowdown at this valuation could introduce some unpleasant volatility. To be fair, Solid State isn’t a one-trick pony with revenue originating from other industries beyond defence. However, since the latter seems to be the primary source of growth, a cyclical downturn could be problematic.

Therefore, I’ll be paying close attention to the growth of its order book. Currently, the influx of new contracts in its pipeline indicates no immediate problems. But should order book expansion begin to slow, it could be an early warning sign of an upcoming cyclical downturn.

The bottom line

While cyclicality can be frustrating, Solid State’s balance sheet looks robust. The group has more than enough cash to cover its upcoming loan obligations. And suppose free cash flow continues to improve? In that case, the company should have sufficient financial resources to weather a downturn in its flagship target markets. At least, that’s what I think.

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With the stock market still reeling from last year’s corrections, finding bargain buying opportunities is far easier than normal. After all, with pessimism and fear still reigning supreme, emotional decision-making from panicking investors is dragging down the valuations of even the best enterprises.

There are quite a few shares on my radar right now. However, one small-cap stock, in particular, continues to impress.

A new king in electronics?

Solid State (LSE:SOLI) is a supplier, designer, and manufacturer of specialist electronic components for a wide range of industries, including industrials, commercial, medical, and defence. Some examples of its products include battery systems, digital displays, imaging technology, and radio antennas, among countless others.

Despite only having a market capitalisation of around £140m, the firm has already established strong ties within the global defence sector. In fact, it has direct access to multiple NATO agencies as well as a close relationship with BAE Systems – a top-tier aerospace & defence business. And looking at the latest results, these relationships have proven exceptionally handy.

It’s no secret that the last couple of years have been filled with tragic geopolitical conflict, kicking off in Ukraine and now Gaza. As such, military spending is on the rise. And that’s created quite a favourable tailwind for Solid State, which just reported 48.1% revenue growth, pushing half-year sales to £88m. Meanwhile, after stripping out the effects of stock-based compensation and acquisition-related expenses, earnings are up 66.7%, reaching £7m.

As such, management now expects to exceed analyst sales and earnings forecasts of £147.3m and £11.9m, respectively, for its 2024 fiscal year ending in March. And pairing this impressive level of growth with a robust balance sheet and a price-to-earnings (P/E) ratio of just 19, Solid State looks relatively cheap in my eyes.

Risk versus reward

Investing in small-cap stocks comes with its own set of risk factors. After all, these types of businesses are far more susceptible to macroeconomic factors, which typically translates into higher levels of volatility – something that the Solid State share price is no stranger to.

The tailwinds of increased defence spending from the UK and the US are an encouraging sight for this business. But the recent stellar performance in this sector may be covering up weakness in others.

The group’s open order book has actually shrunk from £112.5m to £99.7m since September 2022. This isn’t too surprising given that the electronics sector, in general, seems to be seeing reduced demand driven by the current economic landscape. In fact, this was one of the main contributing factors behind the recent slide in XP Power – a leading competitor.

As such, should defence spending growth start to slow before demand returns from its other target markets, the stock may be unable to maintain its current momentum. Nevertheless, with a track record of defying expectations, I’m cautiously optimistic about the long-term potential of this value stock.

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Mostly because it’s grown so much in the last few years, it’s no longer in penny stock territory, with the market-cap now sitting comfortably above £100m.

Supplying critical electronics

The company in question is Solid State (LSE:SOLI). It designs and manufactures electronic components needed for larger systems across various industries, including the automotive sector. And following a series of strategic acquisitions, its reach has begun to extend to enterprise-level customers.

Looking at its latest results, increased demand from the EV and defence sectors has enabled revenues to jump by 48% from £85m to £126.5m between March 2022 and 2023. Meanwhile, operating profit margins have been busy expanding, allowing for underlying earnings to grow from £3.7m to £9.4m over the same period.

Needless to say, this performance certainly suggests management is capitalising well on industry trends. And with a seemingly robust balance sheet, there doesn’t appear to be any immediate solvency or liquidity issues either.

In other words, financially speaking, this ex-penny stock appears to be perfectly positioned to continue thriving. Even more so, considering the order book has another £116.2m worth of contracts in the works versus £89.7m a year ago.

Ex-penny stocks can still be risky

Even though shares of Solid State are up nearly 30% since April, the stock has been through multiple bouts of volatility. For example, between January and March this year, shares dropped by 25%.

During the short term, volatility, especially among smaller businesses, is to be expected. But seeing swings of this magnitude highlights that there remains some significant uncertainty about the long-term potential of this business.

After all, Solid State is by no means the only company operating in this space. And many of its competitors have significantly more financial resources at their disposal to pursue new opportunities.

The group’s small size could also be a disadvantage when seeking priority to source raw materials. Supply chain disruptions continue to wreak havoc within this sector. And if suppliers decide to prioritise larger customers, Solid State’s order fulfilment could slow considerably, causing customers to potentially jump ship.

The bottom line

Nothing is ever guaranteed in the world of investing. That’s especially true when venturing towards penny stock territory. But Solid State looks like an excellent business starting to ramp up operations, in my opinion.

And providing management can continue to capture more market share, the long-term potential seems immense, not just in EVs, but in 5G, IoT, healthcare, and other rising sectors.

Therefore, despite the risk, I think this stock could make an excellent, albeit small, position within my investment portfolio. And that’s why I’m considering snatching up some shares once I have more capital at hand.

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I’m seeing many FTSE shares setting up with compelling long-term potential. And it’s frustrating for me because all my funds are already invested.

However, when spare cash arrives, I’ll be heading for the stocks on my watchlist. And the aim will be to pick those I believe have the potential to double my money. 

And to aim for that, I’ll look for businesses that are growing and compounding their earnings with the potential to expand over a five- to 10-year timeframe. 

Good trading

For example, I’m keen on Michelmersh Brick Holdings (LSE: MBH). As the name suggests, it makes bricks. And trading has been good for the business.

In November, the directors said revenue and profit were ahead of market expectations. And City analysts expect a more than 50% rise in earnings for 2022. We’ll find out more with the full-year report due on 29 March. But the outlook statement in November was optimistic about trading for 2023. 

This is a small company with a market capitalisation around £89m. And its size combines with the cyclical nature of the business to add risks for investors. But I’m bullish about all things relating to infrastructure and the built environment. And I’m hopeful Michelmersh Brick can grow organically and via bolt-on acquisitions.

Meanwhile, with the share price in the ballpark of 96p, the forward-looking earnings multiple is just below 10 for 2023. And the anticipated dividend yield is around 4%. 

I see the valuation as fair, given the nature of the business. But a reasonable valuation doesn’t guarantee a positive investment outcome. All businesses can face setbacks. Nevertheless, I’d be keen to dig in with deeper research with a view to investing for the long term. 

Organic and acquisitive growth

However, I also like Solid State (LSE: SOLI), the electronics company supplying commercial, industrial and military markets. It specialises in value-added components and the design-in manufacturing of computing, power, and communications products. 

Most of the firm’s production is for use in specialist and harsh environments. And in December 2022, it delivered a barnstorming set of interim figures. 

Chairman Nigel Rogers said the business is “building strong momentum despite a more challenging macro-economic climate”.

Driving progress in the USA

The recent acquisition of a company called Custom Power added “resilience” to the overall enterprise.  And the move “accelerated” the expansion of the company’s power business in the “key” North American market. Rogers said acquisitions are “a key pillar” of the growth strategy alongside organic gains.

City analysts predict revenue rises ahead. And set against their estimates for the trading year to March, the forward-looking earnings multiple is around 17. That’s with the share price in the region of 1,360p.

I don’t think that valuation is outrageous for a growth story like this when the business appears to be executing well. However, there may be challenges in the years ahead. And one potential red flag is that earnings are not forecast to grow next year. Although revenue likely will.

Nevertheless, I’d be tempted to dive into deeper research with a view to embracing the risks and holding the stock for the long term.

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But it seems investors caught up in the excitement over EV manufacturers have missed what could be a far more lucrative way of investing in this space. One British company, in particular, is quietly working behind the scenes supplying critical EV components. And with demand surging, the market-cap is expanding rapidly. So much so that in the last couple of months it’s no longer in penny stock territory.

One of the best ex-penny stocks to buy now?

The company in question is Solid State (LSE:SOLI), and its share price is up nearly 30% since October 2022. As a quick reminder, Solid State designs, manufactures, and supplies electronic components for various industries, including aerospace, defence and, of course, EVs.

After decades of steady operational expansion, the firm now has the capacity to work with industry leaders. Among its blossoming list of top-tier clients include BAE Systems, London Underground and, most recently, NATO.

One of its acquired subsidiaries, Willow Technologies, manufactures the globally recognised Durakool relay and contactor electric components. Roughly 20 of these devices can be found in every EV worldwide as they are an essential part of modern vehicles’ drive, battery, lighting, and steering system.

With demand surging across the entire firm’s product portfolio, growth has been fairly spectacular. Looking at the latest interim results, revenue is up 50.8% year-on-year, with pre-tax profits exploding by 98.1%! Pairing this with a continually expanding order book, the ex-penny stock looks primed for even more rapid growth.

What are the risks?

As exciting as this enterprise seems, no investment is risk-free. And while Solid State may no longer be classified as a penny stock, it’s still a small enterprise with a market-cap of just £143.5m.

The biggest concern moving forward is supply chain constraints. So far, the business has proven to be fairly resilient. But management has said component shortages are creating problems that will likely continue throughout 2023.

Needless to say, if Solid State cannot complete orders on time, growth could slow considerably. Not to mention the risk of looking unreliable in the eyes of customers, which would be especially problematic given the firm works with military contracts.

Given management’s track record, I’m willing to give this ex-penny stock the benefit of the doubt. After all, the current supply chain disruptions are hitting almost everyone in the electronics industry. And Solid State seems to be faring better than most.

With EV demand still on the rise, along with other new technologies like IoT and 5G, the business seems to be in a strong position. As such, the potential rewards make the risks worth taking, in my opinion. That’s why I’m tempted to add this company to my portfolio once more capital becomes available.

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So it’s hardly surprising that many such stocks have been sold off in recent months.

While penny stocks are notorious for their elevated risk, this comes paired with the potential for enormous returns. And despite what some share price movements would suggest, not all firms in this stock market segment are destined to collapse.

In fact, I’ve found two penny stocks that are currently chugging along nicely. So much so that it potentially makes them the best investments for my portfolio in October and beyond.

One of the best penny stocks to buy now?

It’s been a rough year for the Water Intelligence (LSE:WATR) share price. As a reminder, the company is a provider of non-invasive leak detection and repair services to the residential and commercial sectors.

With investor sentiment dropping off a cliff, this penny stock has tumbled by 50% in the last year. Yet this volatility doesn’t appear to be backed by rational thinking. At least, that’s the impression I’m getting when looking at the latest results because revenue and profits continue to grow by 44% and 10% respectively.

Regardless of what the economy is doing, a burst pipe needs to be fixed, pronto. And demand is already ramping up as we approach the winter season. Furthermore, with profits and cash flow firmly in the black, its dependence on external financing seems minimal. Even more so when looking at the $21.9m (£19.4m) pile of cash on its balance sheet.

Obviously, this isn’t a risk-free investment. Its small size does create challenges when competing against its more established rivals. And its international presence opens the door to currently unfavourable foreign currency exchange rates. Yet, given its solid track record, even in the current market climate, these are risks I’m willing to take for my portfolio.

Pick #2

Another penny stock that’s lost a lot of momentum this year is Solid State (LSE:SOLI). This is an electronics component designer and manufacturer serving the commercial, industrial, and military sectors.

Over the last 12 months, the share price has actually climbed by around 9%. Yet since the start of 2022, it’s been on a downward trajectory, falling by over 20%. What happened?

Like many of its peers, the group has been struggling with supply chain disruptions, especially when it comes to semiconductors. With customer order fulfilment slowing, it seems investors are jumping ship on fears that clients will switch to a larger competitor that can deliver faster.

While this is a valid concern, it’s worth pointing out that the order book continues to grow, even from customers who know there will be a delay. In fact, in its 2022 fiscal year ending in March, the order book grew by 75.9%. And even with fulfilment delays, the revenue stream continues to grow 28.2%, with dividends following at 21.9% growth.

From what I can tell, the primary issues surrounding this business are all short-term hurdles. And with the long-term picture still intact, combined with a double-digit discount, I can’t help but feel a buying opportunity has emerged for my portfolio.

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But there are more ways to invest in this this space. And it seems many investors are overlooking this £124m business, resulting in a dirt-cheap share price. Let’s take a closer look.

One of the best penny stocks to buy now?

Solid State (LSE:SOLI) is a designer and manufacturer of electronic components for various industries. Historically, management has focused on targeting small business customers that don’t have the expertise to develop their electronics solutions in-house. The strategy has proven to be quite successful so far. But with a niche target audience, growth has been limited.

As such, the group has begun reaching out. Following two recent acquisitions of Active Silicon and Willow Technologies, the firm now has a much larger capacity to handle enterprise-scale clients like BAE Systems. However, it’s the acquisition of Willow that caught my attention.

Much like Solid State, Willow is a designer of electronic products. But among its long list of components includes the globally recognised Durakool relays and contactors. These devices enable remote control switching capabilities, and EVs usually have around 20 of them throughout the drive system, battery, lighting, and steering.

Demand for Durakool components is rising in parallel with the EV industry, creating a potentially explosive growth opportunity for this penny stock. Pairing this with profits already materialising, double-digit revenue growth, and a ballooning order book makes it an excellent addition to my growth portfolio, in my opinion.

Nothing is risk-free

Penny stocks have a well-earned reputation for being risky. And while Solid State seems to be significantly more established than other companies in this space, it still has its fair share of challenges.

Forecasts for 2023 earnings look weak in comparison to historical achievements. And it’s not hard to see why. With supply chain disruptions, especially regarding semiconductors, sourcing the raw materials needed to build its electronic components has been challenging.

As a long-term investor, this is ultimately a short-term problem. However, it’s having a tangible impact on profitability. With raw material costs on the rise, profit margins are getting squeezed. The firm’s small size doesn’t seem to yet provide Solid State with immense pricing power, especially with its vast level of competition.

Nevertheless, given the growth opportunity, I feel this risk is worth taking and would buy it for my portfolio today. EVs are a rapidly expanding industry, but so is 5G, IoT, healthcare, energy, defence, and logistics – all of which this penny stock already has a hand in.

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To be fair, the BoE’s track record of predicting inflation and subsequent recessions is pretty dire, with most warnings being false alarms. Still, it doesn’t hurt to prepare for the worst-case scenario. So, what are the best stocks to buy today with a spare £500?

5G penny stocks of the future

In the grand scheme of things, a recession, while unpleasant, is ultimately a short-term problem. And in the long term, demand for technologies like 5G and eventually 6G will likely continue to surge.

Despite what the headlines would suggest, we’re still in the early days of the next-generation telecommunications network. But that makes it the perfect time to find the potential winners of the future. And while some big industry titans like Qualcomm are operating in this space, a handful of tiny penny stocks are also starting to make waves.

Two that have caught my attention are Solid State (LSE:SOLI) and MTI Wireless Edge (LSE:MWE).

The first is an electronic equipment specialist. It works with small and medium-sized businesses that can’t afford to develop their electronics in-house and are also too small to secure deals with larger industry players. While the target market is undoubtedly niche, the group has demonstrated its ability to build strong relationships. And with its latest acquisitions significantly expanding its capacity, Solid State should be able to scale its offerings in line with customer needs.

The second is a global specialist in radio frequency communication technologies. That includes flat & parabolic antennas and custom solutions for businesses and the military. Management has also begun delving into wireless water control systems for agriculture as well as the public sector.

Seeing the risks and rewards

Both of these penny stocks have already begun to tap into the opportunities offered by the rollout of 5G. So, it’s not surprising to see their revenue streams growing by double-digits. And despite their market capitalisations being lower than £100m, both companies are profitable!

In my experience, it’s rare to see small firms having a positive bottom line. And while there’s some debt on their balance sheets, neither appears to be overleveraged. These are all encouraging signs of long-term growth potential. But that doesn’t mean they’re risk-free.

I’ve already highlighted the stiff level of competition. And with supply chain disruptions, especially in the semiconductor space, sourcing the raw materials required to fulfil customer orders is undoubtedly challenging. If these firms cannot clear their order books quickly enough, clients may start turning to competitors who can.

Needless to say, that could quickly compromise the impressive growth delivered to date. Nevertheless, it’s a risk I feel is worth taking for my portfolio with a small amount of capital, like £500.

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