Most of the assets in my Stocks and Shares ISA are mega-cap FTSE 100 shares, ETFs and investment funds. However, I like to mix it up on occasion and throw in some penny stocks with high growth potential. These can often deliver exponentially higher returns than large-cap stocks.
For example, a 10p stock growing to £1 doesn’t sound that unrealistic. But a £100 stock growing to £1,000? Now that would be surprising! The price of smaller-caps can move (up and down) far more easily than large-caps.
With that in mind, here’s one undervalued AIM stock that caught my attention this week and that I’m researching further.
Mining for the future
Atlantic Lithium (LSE: ALL) develops and operates lithium mines on the West Coast of Africa. It currently has one mine in Ghana and is working on a second in Côte d’Ivoire. Although its headquarters are located in Sydney, Australia, it trades on the London Stock Exchange and is a constituent of the AIM index.
Lithium’s becoming an increasingly desired mineral for the manufacturing of batteries for electric vehicles (EVs) and similar technology. The global lithium market’s expected to grow from $26.8bn to $134bn in the next 10 years — a fivefold increase. That’s huge!
But it’s a slow burn
Since Atlantic Lithium’s just starting out it could be a few years before it starts making sales. That said, getting in now while the stock’s only 13p could net me some considerable returns!
Sadly, last July, the firm was forced to halt operations at its Ewoyaa mine in Ghana after a fatality. The tragedy sent shockwaves through the mining community and gave shareholders the willies. Now the share price is down 35% since, hitting its lowest level since late 2020.
Naturally, we all pray this was a one-off event. If so, the price should recover. But any further accidents could force permanent closure of the mine and threaten the company’s future.
Fundamentals
With the price now so low, analysts expect high growth from the company going forward. Some are forecasting an earnings growth rate of 65% a year, with revenue expected to ramp up significantly in 2026. And with future cash flows also expected to be high, the stock’s estimated to be trading at 90% below fair value!
But for now, it remains unprofitable with earnings per share (EPS) running at a 1p loss. Buying shares in unprofitable companies can turn out very lucrative. But it does bring about a high likelihood of starting at a loss, particularly if the price-to-book (P/B) ratio’s high. For Atlantic Lithium, it’s five times the company’s market-cap per share.
Looking back, the ratio’s been decreasing, down from 14.5 times in 2022. It will likely take another two years before the company becomes profitable and the P/B ratio reaches an equilibrium of 1:1. The share price could rise or fall in that time, so I plan to buy small amounts of the stock each month. That way, I will achieve a better average price per share.
It’s certainly a long-term play – and one that could face several obstacles on the route to success. But that’s the beauty of penny stocks — they offer an exciting mix of risk vs reward!
This post was originally published on Motley Fool
