When it comes to investing in penny stocks, I usually employ a diversified approach. Indeed, investing in these smaller businesses can be quite risky. Therefore, I do not think it is wise to allocate a large percentage of my net wealth to just one or two stocks. I would rather spread my money around.
However, there is one stock I am so excited about, I would be happy to invest £10k in the business right now.
A leading penny stock
Lamprell (LSE: LAM) is a leading provider of services to the international energy sector. This is a volatile, cyclical business. Spending in the oil and gas industry tends to rise and fall with energy prices, which means it can be challenging to predict the future for firms like Lamprell.
This is not a great quality for any business, but Lamprell is changing. It is using its experience to expand into the renewable energy sector, and this is why I am so excited about its potential.
The renewable and green energy sector is booming. With cash flooding into the industry, spending is on track to overtake investment in traditional energy industries in the near future.
Lamprell’s renewables business is roaring. At the end of June 2021, the company’s bid pipeline totalled $6.9bn. This had increased to $7.9bn at the end of October.
Contracts for renewable energy infrastructure made up just over 50% of the order backlog for the first time. Management expects the share of renewables to continue to grow, with the total potential order backlog hitting $6bn this year. The group has continued to make progress with new contracts.
Major headwinds
That said, the penny stock does have some significant challenges to overcome before it can capitalise on this growth. The most important of these is funding. Towards the end of last year, the firm raised £30m from investors for working capital.
The company is dependent on investors and other creditors to fund working capital obligations as it expands its footprint and capitalises on the growing demand for renewable energy infrastructure assets. If funding dries up, the business could hit some significant issues.
Still, what is exciting about this shift is the fact that renewable energy is far more stable than oil and gas. The industry is not susceptible to volatile energy prices, which can significantly impact corporate capital spending plans.
There has always been a certain level of unpredictability in Lamprell’s business model for this reason. But with its exposure to renewable energy increasing, I think the company is going to become far more predictable.
This is the primary reason I am willing to invest £10,000 in the business today. I believe the market is underappreciating its growth potential over the next few years and exposure to the renewable energy sector.