Penny stocks are companies whose shares are valued under £1. Sometimes this low price is warranted, but at other times the stock has huge growth potential. I think I’ve found a company that has this potential! It was able to grow an amazing 20% last year and I think there’s a good chance it could again in 2022.
How do I find good penny stocks?
It can be a real challenge to separate the wheat from the chaff. The market is very good at sorting out what a company is worth at any given time. What investors first need to do is learn about and understand a business: what does it do and how does it make money?
After that we must work out if there is a wider market for that company’s product or service. Does it have room to grow and will it have staying power? Conversely, does the business need to change to survive?
One penny stock example would be Zephyr Energy, a mining and petrochemical company based in London but operating in Utah. Today it trades on the LSE for 6.64p, down 12% from last month. Mining is a crowded and volatile business. There’s lots of competition and companies can have long periods of growth followed by even longer contractions.
Zephyr Energy may be profitable and it may do well in the near-term, but the unavoidable reality of petroleum products is that we need to use less of them, not more. The company could pivot to focusing more on mineral mining but when a company is under pressure to leave its products in the ground, I personally don’t see a lot of room for growth.
An absolute gem
By comparison, I think Idox Group (LSE: IDOX) is a real gem of a penny stock. This UK-based tech company builds software used by public sector services to collect and organise important data.
Idox currently trades for 69p, up from 50p this time last year, and it combines a lot of what I look for in a great investment.
It is a tech company, meaning that it can keep the cost of business low. Small staff, minimum work sites, little to no transport or manufacturing costs for finished products. It also operates an ongoing service for its customers, making it a vital part of their digital infrastructure. I’m sure that anyone in the modern workplace is aware of the importance of digital tools, and how entrenched those tools become once staff are trained to use them. One only needs to look at Idox’s own revenue between 2020 and 2021 to see that more than half (£17.1m) came from repeat customers!
Idox has very recently rolled out a new platform for a local council in Scotland, designed to help collate data on planning permissions and construction within the region. If this software is adopted en-masse across the UK then I think the share price could repeat last year’s uptrend.
Potential risks
All investments come with risks and Idox is no exception. One big concern of mine is how small its profit margins are. This may be down to it being a relatively new company, still allocating capital to growth.
But Idox is expanding, both overseas and domestically. If it can hold onto its current contracts and continue rolling out in new territories, then I could easily see the share price rising again in 2022.
