Is Avacta the best ex-penny stock to buy today?

The Avacta share price is up 250% in five years, but can this ex-penny stock maintain this momentum, or is it a bubble waiting to burst?

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When successful, penny stocks can be game changers. Tiny companies can explode into industry leaders, sending their stock prices through the roof and make their shareholders very rich. Sadly, such explosive potential also comes with potentially devastating risks.

So far, Avacta (LSE:AVCT) shareholders have enjoyed and endured both sides. Those who invested in this biotech business in 2019 are probably celebrating, given the 250% return. Yet those who hopped on the train in mid-2021 are likely questioning everything, given shares are down almost 75%.

It’s a similar story for those who became shareholders at the start of 2024 since shares have tumbled almost 40%. So what’s going on? And is now the time to start buying?

Should you invest £1,000 in Avacta Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Avacta Group Plc made the list?

See the 6 stocks

Volatility of biotech

As a quick reminder, Avacta’s an upcoming diagnostics and cancer therapy specialist. It gained a lot of attention during the pandemic thanks to its lateral flow test kits for Covid-19. But, since the demand for this product has waned significantly following the rollout of vaccines, sales growth has slowed and profitability’s evaporated.

Consequently, investor patience is seemingly running thin. Even more so given the troubles management encountered in receiving regulatory approval for other testing kits in 2023.

This pattern isn’t uncommon for young biotech businesses. Valuations are often driven by expectations. And failing to meet targets can be devastating, especially for small-cap and penny stocks. But is there hope?

Focusing on the long run

As previously mentioned, diagnostics is only one half of this enterprise. The other is cancer therapy. And on that front Avacta’s making encouraging progress.

Following a recent update, Phase 1 clinical trials for its AVA6000 drug have sucessfully completed the second cohort, with the third now underway. That puts the company on track to hit its clinical trial objectives for 2024. And given Phase 1’s where most treatments fail, these positive results are a very encouraging sign.

To help speed things along, the company’s appointed a new scientific advisory board of cancer experts across the US and UK. And with around £35m of cash on the balance sheet, Avacta should have enough capital to complete Phase 1 trials.

Yet, as exciting as this news is, there remains a long journey ahead. There are still two more clinical trial phases to go before reaching the market, each significantly more expensive than the last. And £35m isn’t going to cut it. As such, I wouldn’t be surprised to see large volumes of shareholder dilution moving forward.

But even if it can raise all the necessary funds, that doesn’t guarantee future trials will be a success. Don’t forget over 90% of clinical trials fail.

A risky buying opportunity?

It goes without saying that Avacta’s an incredibly risky investment. Even though its market-cap currently sits outside of penny stock territory at £260m, it seems to be held up almost entirely by expectations of clinical success. After all, shares are currently trading near a price-to-sales ratio of 10.

In other words, even with shares taking a big tumble, they’re still quite expensive. However, should AVA6000 be a success, today’s price may be worth paying. Nevertheless, given that it’s going to be years before AVA6000 will be contributing to sales, assuming it’s successful, this stock seems to me like a massive gamble compared to other opportunities right now. I’m not buying.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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