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Penny stocks can provide excellent returns, but they are high-risk investments. Due to low liquidity, high volatility, and the limited availability of public information on micro-caps, they are not for everyone.
In fact, my portfolio is mostly concentrated in more established stocks, selected from indices known as the FTSE 100 and S&P 500. However, I am looking to add a small number of penny stocks to my portfolio this year.
One that I find attractive is SRT Marine Systems (LSE:SRT). This company develops maritime security and surveillance systems used by coast guards, fishing authorities and shipowners.
A buying opportunity
SRT Marine Systems is AIM-list. The company is a world leader in the supply of maritime domain knowledge products. It produces a variety of Automatic Identification System (AIS) devices, designed to track and monitor vessels at sea.
Although SRT Marine Systems’ stock price has risen 10% over the past year, it has plummeted nearly 19% in 2023. That suggests today’s price could be an attractive entry point for me.
Of course, the business dealt with significant disruption during the pandemic. In the 24 months to March 31, 2022, the company recorded a cumulative after-tax loss of £11 million. But I am more optimistic about the future of the company.
A stock that could sail higher
SRT Marine Systems is profitable again. It posted an after-tax profit of £2.1m in the first half of the current fiscal year. In the first half, the company also generated a whopping 300% increase in revenue year-on-year to £18.8m. Additionally, gross profit margin was marginally higher at 38%.
Additionally, broker forecasts indicate that revenue and earnings growth will increase sharply throughout the year. The outlook is especially rosy for the high-margin systems division, which focuses on intelligence for the coast guard and fisheries.
It is true that comparisons with a period when business activity was depressed due to Covid-19 may seem favourable. However, forward orientation shows promise. The company’s validated portfolio of new systems opportunities now stands at over £600 million.
In addition, the firm continues to innovate. It is currently developing a new NEXUS radio product that will improve user convenience for maritime voice and data communications. This should help broaden the company’s reach into the important market for commercial and recreational marine electronics.
Time to get on board?
The company expects growth over the next five years to come primarily from Asia and the Middle East. In the longer term, the company also aims to seize new opportunities in Africa and South America. I like the exposure this penny stock offers to emerging markets.
Growing global challenges such as smuggling and piracy at sea point to a strong demand outlook for the company’s products.
That said, the current shortage of components for the company’s transceiver arm remains a hurdle that could limit further share price growth. In addition, I am also concerned about the company’s reliance on private bond financing. The balance is not as strong as it could be.
However, there is significant scope to win more contracts. The new deals could be transformative for the company’s profits and cash flow. I wouldn’t want to miss the boat on this penny stock, so if I had cash on hand, I would invest in the company today.
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