I must admit I’m excited when I come across a penny stock that I see potentially becoming a major player in the years to come.
Eleco (LSE: ELCO) could be one such small cap, in my opinion. Here’s why!
Software for building projects
Not all small caps are well-known, so I reckon it’s prudent for me to introduce Eleco. It is a software-as-a-service (SaaS) business that provides project management and operations-based solutions in the construction and building industry. In simpler terms, it helps firms manage construction projects through the use of its software.
Before we dive into the pros and cons of buying Eleco shares, let’s take a look at the shares’ recent performance. Over a 12-month period, they’re up 22% from 63p at this time last year to current levels of 83p.
The investment case
Despite being in penny stock territory, there are lots of positives for me to bear in mind when considering snapping up the shares.
To start with, the business is profitable and has been on a good run of performance in recent years. It’s not a start-up or just finding its feet, like many other penny stocks. I think this is perfectly signified by the fact that it recently won the ‘Project Management Software of the Year’ award for the 10th consecutive year at the annual Construction Computing Awards 2023.
Next, Eleco’s performance growth has been positive in recent years. Switching to a recurring revenue model has been a good move as this helps boost performance and provide stable revenues. Eleco has started rewarding investors, and the shares currently offer a dividend yield of 1.6%. However, it’s worth remembering that dividends are never guaranteed.
Finally, one of the things that emerge from an economic downturn are promises of construction of infrastructure. These include homes, roads, and more to help stimulate the economy. I reckon Eleco could capitalise on a potential construction boom to come, which should boost performance and returns.
From a bearish perspective, shorter-term performance may be impacted by the current economic and geopolitical turbulence. I’ll keep an eye on upcoming performance updates to gauge whether the business has been affected.
In addition to this, the threat of larger software firms entering the space could dent Eleco’s growth. Plus, a takeover bid is a looming spectre I can’t ignore. The latter isn’t necessarily a bad thing. If I bought shares, I may make a profit if they were snapped up for a higher price. This could be the case if the business continues to do well and grows.
What I’m doing now
If I had the spare cash to invest right now, I’d be willing to buy some Eleco shares. Its growth trajectory to date, performance track record, passive income opportunity, and potential future prospects excite me and have helped shape my opinion.
Plus, Eleco shares look decent value for money on a price-to-earnings ratio of 18. This is decent for a profitable, dividend-paying SaaS firm based on the industry average.
