ASX penny stocks are often high-risk. That's because they often represent pre-profitable companies with unproven business models and limited financial transparency, making them more susceptible to volatility and failure.
Yet, they present a serious opportunity as many of the blue-chip companies we consider safe investments today once started their ASX journeys trading for as little as $1.
One strategy for investors looking for upside is to search for ex-penny stocks. These are stocks that have climbed above this threshold into the small-cap range.
One such stock is Austal Ltd (ASX: ASB).
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What is Austral Ltd?
Austal Ltd (ASX: ASB) is an Australian-based shipbuilder that specialises in the design, construction, and support of defence and commercial vessels globally.
Austal's products include naval vessels, defence surface warfare combatants, high-speed support vessels, patrol boats for law enforcement, offshore vessels, as well as passenger and vehicle ferries.
Austal shares were still trading for less than $2 each back in early 2024.
Fast forward to today and these shares have climbed to $6.64 a piece and the company has a market cap over $2 billion.
What is behind the rise?
This year, we have seen investors look towards the global defence investment theme.
Global conflict and political tension has pushed many defence focussed stocks and funds higher this calendar year.
In June, the North Atlantic Treaty Organization (NATO) committed to a massive boost in defence investment over the next 10 years.
In the same month, Austal completed the funding arrangements for a $1.2 billion capital expansion program in the US.
According to Reuters, Austal has been able to ride this military spending wave, while simultaneously its shipyards in the United States have avoided tariffs.
In essence, increased military spending, key contracts in Australia and the US and this tariff relief have been a perfect combination to send this penny stock more than 180% higher in 12 months.
Is there still room for growth?
For those considering Austal shares the question now becomes if they have missed the boat (pun intended).
According to a recent price target from Macquarie, most of the upside is now baked into the current share price.
Following strong earnings results at the start of August, the broker placed a 12 month price target of $7.05 on Austal shares.
From its current share price of $6.64 this indicates an upside of 6.17%.
