ASX penny stocks: what you need to know
Penny stock investing requires a high degree of due diligence, as they represent smaller propositions that usually come with a far higher risk-to-reward ratio.
In the UK, a penny stock is defined as any share worth less than £1 each. In the US it’s any under US$5 (circa AUD$7).
In Australia, many classify penny stocks as those under one Australian dollar per share, while some use the definition loosely to describe any company with smaller share prices. It’s also worth noting that penny stocks can have high-value market caps if large numbers of shares have been issued.
Here is a list of ten of the most promising penny stocks listed on the ASX as of June 2023, for those investors who are interested in smaller listed companies with greater potential growth.
1. Minrex Resources (ASX: MRR)
2. Carbon Revolution (ASX: CBR)
3. Piedmont Lithium Ltd (ASX: PLL)
4. Engenco Limited (ASX: EGN)
5. Perenti Ltd (ASX: PRN)
6. Australian Agricultural Company (ASX: ASC)
7. Tesserent Limited (ASX: TNT)
8. Vection Technologies Ltd (ASX: VR1)
9. Argosy Minerals (ASX:AGY)
10. King River Resources Ltd (ASX: KRR)
1. MinRex Resources (ASX: MRR)
MinRex Resources Limited was founded in 2011 and is a mining company that focuses on the exploration and development of battery metals. The company has lithium-tin-tantalum projects in the world-renowned mining region of the Pilbara in Western Australia.
MinRex may have considerable growth potential, given the increasing uptake of electric vehicles around the world that will drive global demand for battery metals.
In addition to its lithium projects, Minrex also has a highly prospective portfolio of gold-copper projects in both Western Australia and New South Wales.
2. Carbon Revolution (ASX: CBR)
Geelong-based Carbon Revolution is a Tier 1 OEM supplier that specialises in the manufacture of lightweight carbon fibre wheels for the global automotive industry.
The company currently has OEM programs with leading automotive brands including Ford, Ferrari, General Motors and Renault, catering to the performance and premium end of the market.
CBR recently saw a surge in its share price after securing US$60 million via a new debt program, to fund mega-line automation and capacity expansion, as well as cover general corporate and working capital costs of up to US$37 million.
CBR is also currently pursuing a merger with Twin Ridge Capital Acquisition Corp.
3. Piedmont Lithium Ltd (ASX: PLL)
Piedmont is another Australian resource company that stands to benefit from the rapid uptake of electric vehicles and increasing demand for lithium batteries.
Most of the company’s chief lithium projects are situated in North America, in the Canadian province of Quebec and the US states of Tennessee and North Carolina. This puts PLL in good stead should economic decoupling from China lead to the US resuming the domestic manufacturing of batteries.
4. Engenco Limited (ASX: EGN)
Engenco is a transportation services provider with a diverse range of businesses catering to clients in Australia’s defence, resources, rail, heavy industry, mining and infrastructure sectors.
EGN subsidiary Gemco Rail cinched a deal in early June to build a rail ore car manufacturing facility in the Australian mineral hub of the Pilbara, further cementing the company’s position as a leading provider of transit services to the stalwart mining sector.
5. Perenti Ltd (ASX: PRN)
Mining services company Perenti engages in a broad range of operations, including surface mining, underground mining and mining support services.
The firm posted impressive earnings for FY2022, including a 21% rise in revenue and a 12% increase in EBITDA, taking earnings to $426.4 million.
CEO Mark Nowell is optimistic about Pereneit’s prospects over the next several years.
‘Perenti is positioned to deliver a step-up in cash-backed profits in 2023, with further improvements expected to drive earnings growth through to FY2025 and beyond,’ Norwell said.
6. Australian Agricultural Company (ASX: ASC)
Beef producer Australia Agricultural Company lays claim to the largest cattle herd in the country, putting it in a strong position to benefit from ongoing rises in food prices amidst the prevailing inflationary environment.
The company is currently pursuing a strategy of selling beef into global markets, to better insulate itself from fluctuations in the domestic cattle market.
Operating profits in FY2023 came in at $67.4 million, an increase of 35% compared to the previous financial year.
7. Tesserent Limited (ASX: TNT)
Tesserent is a cybersecurity company that provides a range of services to businesses in Australia and New Zealand. These cybersecurity services include threat intelligence, network security, and compliance and governance.
Tesserent has some of Australia’s top security experts at its disposal, having recently appointed Anthony Sheehan, the former Deputy Director-General with the Australian Security Intelligence Organisation (ASIO), as a non-executive director.
8. Vection Technologies Ltd (ASX: VR1)
Vection is a software company that develops virtual and augmented reality solutions for businesses. The company’s products include real-time 3D rendering software, virtual and augmented reality platforms, and training and simulation solutions.
Vection recently obtained several patents across the US and Europe related to its INTEGRATEDXR technology stack, as well as obtained a $1 million defence pilot order from a global defence contractor. The company’s share price could remain buoyant should the buzz surrounding virtual reality and augemented reality translate into real returns for technology providers.
9. Argosy Minerals (ASX: AGY)
Argosy specialises in the development of overseas lithium projects – a strong area of potential growth given the increasing uptake of electric vehicles internationally.
Its flagship development is the Rincon Lithium Project in Salta Province, Argentina, in which it currently holds a 77.5% interest. Argosy expects to eventually hold a 90% interest in the Rincon project.
In addition to Rincon, Argosy is also the full owner of the Tonopah Lithium Project in Nevada, USA.
10. King River Resources Ltd (ASX: KRR)
Founded in 2002 and headquartered in Perth, King River is a mining exploration company that focuses on developing rare earth minerals and other mineral projects in Western Australia.
The company’s main project is the Speewah Specialty Metals Project, which has significant deposits of rare earth minerals and vanadium. King River’s share price could benefit from increasing demand for rare earth minerals as a result of the broader adoption of electric vehicles.
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ASX penny stocks: further important information
ASX penny stocks are often thinly traded. This means that unlike the blue-chip shares of the ASX 200, where every stock usually has a wall of potential buyers, there may not always be enough buyer demand when investors want to sell.
In addition, penny stocks are often loss-making, using any money available to invest in growth. This makes them highly speculative investments. Moreover, they usually receive little to no analyst coverage, making truly informed trading decisions difficult.
They can also even lack in-depth trading records. And some penny stocks are notorious for diluting stock value by issuing additional shares.
These risk factors mean that for most investors penny stocks should only form a small percentage of one’s portfolio. And for those closer to retirement who are investing over short timeframes, they arguably should be avoided altogether.
Of course, despite these significant risks, ASX penny stocks hold a unique advantage. The right pick can be massively more lucrative than an investment in more established peers.
However, it’s important to beware of the echo chamber of success. Skyrocketing penny stocks are extremely likely to hit mainstream news, but the success stories are significantly outnumbered by the failures. Moreover, once an ASX penny stock hits the headlines, it’s often too late to partake in its success.
But many of the largest blue-chip stocks on the ASX began trading as penny stocks. For example, the largest stock on the ASX, BHP, used to be a penny stock back in 1999. Afterpay was a penny stock as recently as 2017. International market titans Apple and Amazon also once qualified as penny stocks for the investors with the foresight and luck to invest early.
However, even if an investor buys into a successful penny stock at an early stage, they can only experience the full financial benefit if they continue to retain their shareholding, even after it has doubled, tripled, or even exploded in value.
And psychologically, investors must also be confident that others will hold their shares, as it only takes relatively few sellers to depress a penny stock’s share price.
This is complicated by the hallmark thin trading; a penny stock that has just doubled in price may not have enough buyers if too many are selling at the same time. This all requires extremely high conviction.
For this reason, an ASX penny stock must have a solid investment case that remains strong regardless of volatile share price movement. For example, this could include new technology, like Apple’s iPhone, a unique idea, such as Amazon’s approach to online shopping, or even something as banal as exclusive rights to a mining project.
But it’s also important to note the positives. When a company is small, it can be easier to grow quickly, while larger companies eventually reach a growth rate ceiling. And ASX penny stocks offer retail investors the ability to buy large numbers of shares for relatively little money.
This means an investor can benefit from the potentially rapid growth of a large number of penny shares across multiple sectors, whilst also keeping the high-risk investments as only a small percentage of their overall portfolio.
In the current economic environment, many penny stocks are struggling to access finance as investors flood to blue chips. Of course, this elevates the risk-reward ratio even higher, as some are now available at a discount compared to relative risk.
In summary, ASX penny stocks usually constitute highly risky investments with the potential to deliver supersized returns.
