Penny stocks are notoriously risky. These tiny enterprises typically have a lot to prove and are in a constant state of needing funding, especially those operating on the bleeding edge of innovation. With interest rates drying up liquidity in the capital markets, this class of equities has been hit hard in recent years. Some have even ventured into the realms of bankruptcy.
However, despite this elevated risk, some investors are still keen on pursuing opportunities within this space. After all, just one successful early investment into a penny stock can lead to explosive returns that can undo the losses of other positions. And right now, Nanoco Group (LSE:NANO) is making waves.
Investing in nanotechnology
While Nanoco isn’t a household name, owners of Samsung’s QLED TVs have been exposed to its technology. The firm is a developer and manufacturer of cadmium-free quantum dots. These nanomaterials have a broad range of specialist uses, from medical diagnostics to electronics.
In the case of Samsung, the electronics giant was using them to improve the quality of the backlighting within its LED displays. Or at least that was the conclusion of a recent legal action brought forward by Nanoco, which it ultimately won through settlement.
Following this outcome, the firm has just had its balance sheet flooded with $71.8m (£58.8m) in net proceeds. Apart from solving the group’s capital requirements, Nanoco is on track to hit management’s target of being financially self-reliant by 2025.
At the same time, the firm also just secured its first commercial production order for its nanomaterials to be used in infrared sensing. And to top things off, it’s formed a two-year joint development agreement with STMicroelectronics, as well as another one with an undisclosed Asian chemical enterprise.
With all this in mind, the group’s £67.5m market capitalisation is looking cheap. Or at least, that’s what management’s implying following the announcement of a 24p tender offer totalling £30m and another £3m buyback programme at market prices.
Risks and rewards
Even with the £33m return of capital, Nanoco could have around £34m of cash liquidity left on its balance sheet to fund its operations. That’s more than sufficient to keep the lights on for several years and provides management with the flexibility to accelerate its R&D activities. This is generally something I like to see when analysing businesses.
However, as encouraging as this progress has been, there’s still a long road ahead. With the company transitioning from a research-based to a commercial-based enterprise, there’s a risk of disruption.
Such business evolutions can come paired with a lot of complications that may lead to order delays and unexpected costs. In fact, this is precisely what happened with another popular penny stock called ITM Power.
Despite my optimism for this enterprise, I’m keeping it on my watchlist for now. There’s no denying its explosive long-term potential, but the company still has a lot to prove. But suppose it sucessfully hits its 2025 target milestone? In that case, I may have to reconsider my position.
