Penny stocks are characterised by having a low market cap (£100m or less) and a share price below £1. There are plenty that fit this bill on the London Stock Exchange. However, not all penny stocks are worth buying. As with any stock, an investor need to find tangible reasons why the company could outperform going forward. Here’s one I’ve spotted that could have a very bright future.
Being involved in a growing sector
The company I’m referring to is Aquila Energy Efficiency Trust (LSE:AEET). It has a current share price of 75p and a market cap of £74m.
The trust is focused on the buzz phrase of energy efficiency. As such, it invests in companies in both the private and public sectors that are involved in projects to drive such efficiency. An example that it gives is that of energy-saving light bulbs.
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It has a large amount of overlap into renewable energy. This is a huge area of growth over the next decade, with an incredible push by both governments and private companies. I like the fact that the trust has diversified exposure around Europe and isn’t just UK-focused. The large markets aside from the UK are Spain, Germany and Italy.
Being clean helps profit too
Being ESG-friendly and operating in a growing area is great, but what about financial returns? The fact that the business is involved in the energy space actually helps to boost profitability.
For example, it has invested in a large residential project in Italy to improve energy efficiency within the apartments. By helping the thermal insulation and heating systems, the company receives tax credits back from the government worth 110% of the cost of the measures. These tax credits can then be sold to a third party, such as a bank.
The business is doing this, helping to make an overall 8-9% annual return on the project.
Taking a look at the share price returns
Despite these promising notes, the share price has fallen by 6% over the past year. The penny stock growth hasn’t yet taken shape.
I feel some of this has been due to the announcement last year that the dividends paid wouldn’t be fully covered by earnings. It therefore had to pay out some of its cash from reserves. Even though it said that the lack of earnings was simply due to not having deployed enough capital at the time, it isn’t a great look for the business.
This is a risk going forward, which might scare off some income investors. Yet this fund is for both income and capital growth. If anything, I feel the stock’s growth in coming years will be more from capital appreciation as more projects yield successful results.
Ultimately, I think this relatively unknown stock could take off in the future due to the sector it focuses on and the return it can earn on projects. It’s a growth stock that investors I think I think investors could consider as part of a diversified portfolio.
