The low cost of penny stocks means that occasionally they can throw up spectacular returns. Indeed, some recent research from CMC Markets highlights a couple of one-time penny stocks that each saw their value soar by over 50,000%.
Although neither of those shares trade for pennies today, I would still consider buying them both for my portfolio now. I also think their stories can help me in my own hunt for potentially lucrative penny stocks to buy for my portfolio.
Pennies shares that soared
The two names in question are famous ones now – Apple (NASDAQ: AAPL) and Netflix (NASDAQ: NFLX).
But what is striking is that one of them was already a famous name even when it was trading for pennies. Apple went public in 1980, seeing its share price on the first day of trading soar from $22 to $29. But by 2002 the Apple share price had crashed as low as 4c. Between its low and high prices, Apple shares soared an incredible 154,900%!
Compared to that, the gain between high and low at Netflix looks more modest, coming in at 54,840%. But that is still an incredible growth feat few shares would ever match. To put it into perspective, it means that if I had put £1,000 into Netflix when its share price touched an all-time low, I could have made more than half a million pounds in profit by selling my investment at the high share price.
Why I’d buy both today
Clearly I have long since missed the opportunity to invest in these two tech titans for pennies. But I would still consider buying their shares for my portfolio today despite the much higher share prices than some years ago. Indeed, I have already bought Netflix shares this year.
I think some of the things that have helped propel the companies to success in the past remain relevant today. They have built strong brands that give them pricing power. Both have large installed customer bases. Both compete in an area where I think demand is likely to grow in coming years, as consumers spend more and more time on their digital devices.
There are risks. For example, declining subscriber numbers at Netflix could lead to lower revenues and profits. As consumers tighten their belts as the economy worsens, both companies could suffer from customers cancelling service subscriptions to cut household costs. But in the long term, I think the quality of the businesses will help them perform well. They have strong brands and unique service offerings, giving them competitive advantages.
My lesson on hunting for penny stocks to buy
Why did those two penny stocks perform incredibly well when many do not?
I think one reason is that, from the outset, both had a unique competitive advantage. That meant that, as they grew their customer bases, they could grow profits without always adding on costs at the same rate. That is the beauty of a scalable business model. It is something I will continue to look for when buying shares for my portfolio, including penny stocks.