Penny stocks are a risky section of the stock market. These often-tiny businesses typically have limited resources and an unproven business model. That’s why many are so small in the first place. But every once in a while, a few gems emerge from the sea of mediocrity. And if successful, these can deliver monstrous returns for my portfolio.
The deadline to maximise my Stocks and Shares ISA is fast approaching. And now seems like the perfect time to explore such opportunities. With that in mind, here are two penny stocks that I think could be risky, but lucrative, candidates for my portfolio.
Profiting from scientific innovation
Scientific experiments lie at the heart of research & development for engineering and pharmaceutical-led firms. Most of this can’t be completed without the proper equipment. That’s where Judges Scientific (LSE:JDG) steps in. The company is a designer and manufacturer of specialist scientific instruments used worldwide, from the perfume labs of L’Oréal to the CERN supercollider.
This market is highly fragmented, with many players specialising in different fields. However, Judges Scientific is fairly unique since it targets a wide range of applications thanks to being a serial acquirer of pre-established businesses.
This bolt-on strategy has proven to be highly lucrative for the penny stock, with profits growing by an annual average of 27% since 2017. And that includes the adverse effects of the pandemic and subsequent supply chain disruptions.
Of course, acquisition-based growth strategies come with their fair share of risks. Suppose management makes a series of poor decisions, and newly acquired firms fail to meet performance expectations? In that case, its impressive growth track record could come grinding to a halt while simultaneously compromising its balance sheet.
Despite this threat, the penny stock seems to have prudent leadership at the helm. And with the need for scientific instruments unlikely to disappear any time soon, I think this business could be an excellent addition to my portfolio.
A penny stock with explosive potential
Staying on the theme of science, Solid State (LSE:SOLI) is another penny stock that caught my attention this week. The group is a designer, manufacturer, and supplier of electronic devices and components to the defence, energy, medical, and transportation industries.
Historically, Solid State has targeted small and medium-sized businesses. It handles projects too complex for clients to perform in-house but too small for the larger electronics companies to be interested in. However, following a series of recent acquisitions, the firm has drastically expanded its product portfolio and manufacturing capacity. And it’s already landed multi-million dollar contracts with clients like BAE Systems as a result.
With profits growing consistently by double-digits over the last five years, even during the pandemic, I’m not surprised to see the stock climb nearly 60% in the past 12 months. But even with this impressive track record, there remain plenty of risks ahead.
The most prominent threat at the moment seems to be supply chain disruptions. With the cost of raw materials increasing and availability running thin. Solid State may start losing customers to larger electronics firms with more robust supply lines.
Despite this risk, the growth opportunity looks highly lucrative, in my opinion. And that’s why I’m considering this penny stock for my portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Judges Scientific. 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.
This post was originally published on Motley Fool
