Penny stocks are risky investments. But it can be worth taking on the risk (cautiously) as these stocks can sometimes generate huge returns.
Here, I’m going to highlight one I feel has a lot of potential. Currently, it trades for just 19p.
A UK cybersecurity company
The stock I’m zooming in on today is Corero Network Security (LSE: CNS).
It’s a UK-based cybersecurity company that specialises in Distributed Denial of Service (DDoS) protection solutions. A DDoS attack is a malicious attempt to disrupt a server, service, or network by overwhelming the target or its surrounding infrastructure with a flood of internet traffic.
Listed on the London Stock Exchange’s AIM, the company has a market cap of just £97m at present. So, we’re talking about a very small company here.
Why it’s worth a closer look
Now, I tend to steer clear of penny stocks these days. Generally speaking, they’re a little too risky for me.
But this company looks really interesting, in my view.
For a start, it operates in a rapidly-growing industry (to which I want more portfolio exposure). Today, the cybersecurity market is absolutely booming as businesses and government organisations scramble to protect themselves from cyber threats.
This year alone, cybercrime is set to cost the world around $9.5trn, according to Cybersecurity Ventures. So, organisations can’t afford to ignore this area of technology.
Cybercrime is the greatest threat to every company in the world
Ginni Rometty, former Chair and CEO of IBM
Additionally, the fundamentals here look pretty good. This year, the company’s revenue is expected to increase 25% to $27.9m. Meanwhile, earnings per share are expected to come in at 3.4 cents versus 0.0 cents last year.
It’s worth noting that in April, the company told investors that it was seeing “significant order momentum” from both existing and new customers for its SmartWall ONETM DDoS protection solution.
As for the valuation, it’s really low. Currently, the stock trades on a price-to-earnings (P/E) ratio of just 6.5. In other words, it’s dirt cheap at the moment, despite a rise in the share price recently.
Risk vs reward
In terms of the risks, there are a few that come to mind.
First, the cybercrime landscape is always evolving. Just because a company is having success fighting such crime today doesn’t mean it will continue to have success in the future.
Second, this is a competitive industry and the company is up against some big players that are hundreds of times its size. A lot of businesses may prefer to obtain protection from larger, more established entities.
Third, analysts’ forecasts for these kinds of stocks can be way off the mark. So, the earnings per share forecast could turn out to be too high (meaning the stock isn’t as cheap as it looks).
At the current share price and valuation, however, I think the risk/reward skew looks attractive.
I’ve added the stock to my watchlist and I may have a nibble at some stage.
