Despite all the recent stock market turmoil, the allure of penny stocks remains as strong as ever. Investing in these tiny enterprises comes paired with extraordinary risk and volatility. Yet all it takes is one success story to send a portfolio skyrocketing.
Almost all penny stocks promise the world in the form of explosive growth potential. Yet, sadly, few ever actually deliver on such promises. After all, analysing business financials rarely leaves a good impression as most of these firms are pre-revenue, let alone pre-profit.
Instead, investment decision-making often has to be made based on long-term potential and qualitative characteristics such as talent and leadership. And with that as the criteria, Helium One Global (LSE:HE1) has been turning a lot of heads lately.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
A future industry leader?
Since the start of 2024, the Helium One share price has exploded by over 300%. Yet zooming into the last six months, the stock’s down by almost 40%. This see-saw motion is nothing new for penny stocks and is likely being created by short-term traders profiting from the stock price volatility.
Underneath all this chaos lies the business. And from an operational standpoint, Helium One has made some impressive strides lately. In fact, the helium exploration business has just recently submitted its application for its first mining license in Tanzania. This came off the back of a completed feasibility study which showed promising evidence of large helium deposits within the group’s exploration area.
What does this mean for investors? Providing that the license is granted and the feasibility study’s accurate, Helium One will soon be transitioning from exploration to production.
In other words, revenue could be just around the corner. And with helium gas prices on the rise, courtesy of higher demand from the healthcare, aerospace, manufacturing and transportation industries, the group may soon become flooded with cash.
Time to buy?
As encouraging as the firm’s progress has been, there’s still a long road ahead. Even if mining licenses are granted, transitioning to a production-ready enterprise comes with its own set of headaches and costs. And while the business has around £8.7m of cash on the balance sheet, that’s likely not going to be enough to see this transition completed.
Since Helium One isn’t likely to be eligible for low-cost debt, management’s fundraising activities will likely have to be done through equity. And, sadly for shareholders, that means dilution, which is something that’s already started taking place.
In the long run, this dilution may prove insignificant if its Rukwa project lives up to expectations. However, a market capitalisation of £60m despite having no revenue stream suggests that a lot of this growth potential’s already baked into the stock price.
Therefore, personally, I’m not rushing to add this penny stock to my portfolio right now. But it’s definitely a business I’m keeping close tabs on moving forward. And once helium production’s under way, I may have to reconsider my position.
