According to Google, a penny stock is: “A common stock valued at less than one dollar, and therefore highly speculative.”
Luckily, I don’t get my medical nor my financial advice from Dr Google because the best investments I’ve ever made have been penny stocks that have proven to be anything but speculative.
“Small” does not equal “risky”
You can cut a $5 cake into 10 pieces or 100 pieces but it’ll still be a $5 cake. The price of one piece doesn’t change that.
Likewise by simply assuming a stock is “speculative” because its share price is below $1.00, doesn’t make sense. Sure a $50 million mining minnow is more risky and likely much more volatile when compared to titans like BHP Billiton Limited (ASX: XJO) but, as you’ll see below, writing off a stock because its small can be a costly mistake.
Here’s how I’d allocate $10,000 across my favourite penny stocks right now.
1. Biotechnology: ADMEDUS FPO (ASX: AHZ) was my top stock pick for October 2013. After rising over 100% two months later, the stock has settled back down at just $0.13 per share, or 46% higher than the price I recommended it. However, just last week I added to my holding of Admedus because I feel it is still significantly undervalued given its long-term potential. I would allocate $3,500 to this stock.
2. Oil and Gas: Senex Energy Ltd (ASX: SXY) is a $790 million oil and gas explorer in Australia’s Cooper Basin. Despite a very impressive balance sheet and growing reserves, Senex’s share price has moved very little in the past two years. However, if you’re patient investor and bullish on LNG prices in the long term, Senex could be what you’re looking for. I’d invest $2,500 of my $10k in Senex.
3. Gold: Doray Minerals Limited (ASX: DRM) is a $137 million gold miner with one of the highest grade, lowest cost mines in Australia. Despite the biggest gold price drop in over 30 years during 2013, the company is posting strong cash flows and debt is expected to drop. $1,500 is what I’d shovel into this exciting gold play.
4 & 5. Technology: Nearmap Ltd (ASX: NEA) and MOBEMBRACE FPO (ASX: MBE) are two junior technology companies I’d buy with $1,500 and $1,000 of my money, respectively. Neither are in my portfolio now but both continue to show promise, with shares up 500% and 880%, respectively, over the past five years.
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While it can be useful to maintain a well-diversified stock portfolio and in reality we’re not restricted to owning just penny stocks, I would be comfortable holding each of these stocks for many years into the future.
However none of these stocks offer generous dividend yields to complement their growth prospects. That’s why there’s another ASX stock I’d consider buying before of any these.
Motley Fool Contributor Owen Raszkiewicz owns shares in Admedus FPO.