Penny stocks are notoriously volatile and risky. But they can also turbocharge my portfolio returns due to their small size.
One share that has caught my eye recently is Seraphim Space Investment Trust (LSE: SSIT). This is a venture fund focused on space technology that went public at 100p exactly two years ago.
At present, the trust has a market capitalisation of £71m and the shares trade for 29p each. So we’re looking at a 71% drop since the stock debuted on the market.
Should you invest £1,000 in Seraphim Space Investment Trust Plc right now?
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Here’s why I’d snap it up today.
A growing global space market
McKinsey estimates that the global space economy will grow from approximately $447bn today to $1trn by 2030.
Elon Musk’s SpaceX continues to dramatically lower the cost of launching satellites and accessing space. As a result, the number of active satellites could triple within the next decade.
Seraphim Space’s purpose is to benefit from this outsized growth by identifying and investing in early-stage space technology companies from inception to exit.
Since 2016, it has supported 100 companies that have collectively raised $2.2bn in equity funding with an aggregate enterprise value of more than $10bn. This, the firm says, makes it the world’s most prolific investor in space.
A massive discount
The total value of the portfolio is estimated to be £220m, yet, as mentioned, the trust’s market cap is just £71m. That means the shares are trading at a whopping 67% discount to the underlying net asset value (NAV).
Responding to this, the company has enlisted Morgan Stanley to repurchase up to 35,883,800 of its ordinary shares.
Buying back shares is widely used by investment trusts when trying to narrow the gap between share prices and asset values.
The portfolio
In a recent trading update, the fund noted a number of positive portfolio developments during the year to 30 June 2023:
- Eleven of its companies successfully closed investment rounds.
- Most rounds were led by new external investors, with the fund participating in two-thirds of them.
- It made six of its investments at higher valuations relative to previous rounds, versus only one at a lower valuation.
Reassuringly, it said that its existing £35m can support the fundraising requirements of its portfolio over the next 12 to 18 months.
It currently has 29 investments, most of which are firms focused on satellites in one way or another.
These are the top 10 holdings, as of 31 March:
I like this stock
Of course, some of the trust’s investments will undoubtedly fail, as is the way with venture capital funds. But I’d hope a handful of investments could become valuable over time. These would be the ones that drive portfolio — and hopefully shareholder — returns.
In terms of the massive 67% discount, I think it could offer a margin of safety for me. The recently announced share buyback programme could help narrow the gap, though that’s not guaranteed.
Plus, the company remains well capitalised and is able to continue supporting its young companies.
While I wouldn’t ever make a penny stock a top position, this trust would give my portfolio unique exposure to the global growth of the space economy. If I had spare cash to invest, I’d buy today.
