The world of penny stocks can be an exciting arena. After all, successfully identifying a tiny enterprise that becomes an industry titan can reap ginormous returns in the long run.
However, for every winner, there are countless losers. And two penny stocks in particular are looking increasingly like they belong in the latter.
With that in mind, let’s take a closer look at what went wrong and whether there is any hope for a comeback.
The fall of the Cineworld empire
A few years ago, Cineworld (LSE:CINE) was one of the largest cinema chains worldwide. It had delivered more than a decade of growth to shareholders following the 2008 financial crisis reaching a stock price beyond 300p. Today, it trades for less than a penny.
On the back of the disastrous fallout of Covid-19, a debt-ridden balance sheet, and a legal battle over a poorly-timed acquisition, Cineworld has collapsed spectacularly.
The firm is currently undergoing administration procedures, negotiating with lenders through a bankruptcy court in a final effort to restructure and try to save itself from oblivion. And to its credit, Cineworld has made solid strides, based on the recent Chapter 11 updates.
The bulk of creditors seems to be on board with the plan. As such, the company is currently expecting to emerge from Chapter 11 in July this year. Obviously, that’s some relief for shareholders. However, repairing the damage will take years.
In the meantime, competitors are already capitalising on the penny stock’s weakened state, stealing market share that will undoubtedly make the recovery process even longer.
The shifting crypto landscape
A few years ago, Argo Blockchain (LSE:ARB) was one of the most popular shares on the London Stock Exchange, reaching its peak in February 2021. Since then, it’s been nothing but downhill for the Bitcoin mining company.
Despite what the share price would indicate, management has made solid progress in expanding its mining capacity. And in May this year, a total of 173 Bitcoin and equivalents were successfully mined. That’s roughly 16% more than the previous month.
However, while production is up, like any commodity business, the bottom line is almost entirely dependent on the fluctuating price of its products, over which the firm has no control. And with US regulators now clamping down hard on the cryptocurrency space, filing lawsuits against some of the largest exchanges in the world, the future of Bitcoin is surrounded by uncertainty.
Suppose new regulations deter the use of digital currencies. In that case, the price of Bitcoin may be set to fall even further, let alone make a recovery. And while this is the worst-case scenario, Argo Blockchain’s business model would be severely compromised.
Are penny stocks worth it?
Penny stocks are notoriously difficult to assess. Apart from the lack of coverage by other analysts, they’re often held to less strict reporting requirements than larger enterprises. This is one of the main reasons why fraud is more prominent among small-cap stocks.
Nevertheless, even with the elevated risk profile, investors with a stomach for volatility can stumble across game-changing opportunities. But it’s critical to closely investigate the business model, financial health, and competitive advantages. After all, only the best companies can deliver sustainable long-term wealth.
The post 2 penny stocks I’d avoid like the plague appeared first on The Motley Fool UK.
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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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