Investing in penny shares is a popular strategy, and Quadrise Fuels (LSE: QFI) certainly fits that category. The QFI share price is just 5p, but it has climbed 220% over the past 12 months. Along the way, it dipped as low as 1.15p at one stage. So what’s the story, and is this a penny share that could make me rich?
It’s all about synthetic heavy fuel oil (HFO). My Motley Fool colleague Zaven Boyrazian has explained it. In short, HFO is a fuel derived from oil and used by cargo ships. But it’s not exactly clean — it’s big in greenhouse emissions, and highly toxic. That’s where Quadrise Fuels and its Multiphase Superfine Atomised Residue (MSAR) technology comes in. It’s a way to combine HFO residue with water and produce a non-toxic alternative fuel with reduced carbon dioxide and nitrogen oxide emissions.
That sounds good to me, and the industry seems to like it too. This bioMSAR product, as its called, dominated the company’s interim results released in March. So, we have an effective technology, producing a lower-emissions fuel that could be in heavy demand in the coming years. The QFI share price gains since the formal launch in December do not surprise me.
What’s the downside?
But it can’t all be roses, can it? Well no, as the financial situation does look risky to me. Many a promising growth company with an exciting new product has tempted me over the years. But the need to keep seeking new finance has diluted out the early investors and left them with little or nothing.Â
Quadrise Fuels is not profitable yet, reporting a £2.3m loss for the six months to December 2020. And that has to put a drag on the QFI share price. There was £1.1m in cash at 31 December. And Quadrise raised £7m from a placing in March. There should be enough to keep the company going until July 2022, but is that long enough to turn to profit? I think it’s very likely that further cash will be needed before we see any profits. Still, Quadrise does have a proven product, which is better than many growth companies at this stage in their development.
QFI share price history
I keep coming back to the QFI share price of just 5p. Now, the absolute level really doesn’t matter. The company would be exactly the same with one hundredth of the number of shares priced at 500p. But there’s one rule of thumb I always remember. Penny shares almost never start out that way — they usually start a lot higher and then crash.
That’s exactly the story at Quadrise Fuels. Back in 2013, investors valued the shares at more than 50p. We’re looking at a 90% fall in a little over seven years. Still, past performance is not a guide to future performance, and that works both ways. Just because the QFI share price has crashed in the past, that doesn’t mean it won’t keep on rising over the next few years. There are plenty of risks here, and I rarely buy unprofitable growth stocks or penny shares. But this one does tempt me.