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Most of the assets in my stocks and shares ISA are mega caps. FTSE 100 Index Stocks, ETFs, and mutual funds. However, I like to mix it up from time to time and add some penny stocks with high growth potential. These can often generate exponentially higher returns than large-cap stocks.
For example, a 10p share going up to £1 doesn't sound so unrealistic, but a £100 share going up to £1,000? Now that would be surprising! Small-cap share prices can go up and down much more easily than large-cap share prices.
With that in mind, here is an underrated AIM Stock that caught my eye this week and I am investigating further.
Mining for the future
Lithium from the Atlantic (LSE: ALL) develops and operates lithium mines on the west coast of Africa. It currently has one mine in Ghana and is working on a second in the Ivory Coast. Although headquartered in Sydney, Australia, it is listed on the Australian Stock Exchange. London Stock Exchange and is a component of the AIM index.
Lithium is becoming an increasingly desirable mineral for the manufacture of batteries for electric vehicles and similar technologies. The global lithium market is expected to grow from $26.8 billion to $134 billion over the next 10 years, i.e. a fivefold increase in value. That's huge!
But it is a slow process
As Atlantic Lithium is just getting started, it could be a few years before I start selling. That said, investing now, while the shares are worth just 13p, could earn me a considerable profit!
Sadly, last July, the company was forced to halt operations at its Ewoyaa mine in Ghana after a death. The tragedy shocked the mining community and left shareholders nervous. Now, the share price is down 35% since then, hitting its lowest level since late 2020.
Naturally, we are all praying that this is an isolated incident. If it is, the price should recover. But any further accident could force the mine to close permanently and threaten the future of the company.
Fundamentals
With the price so low now, analysts expect high growth from the company in the future. Some are forecasting a 65% annual earnings growth rate, with revenues increasing significantly in 2026. And with future cash flows also expected to be high, the stock is estimated to trade 90% below fair value.
But for now, it remains unprofitable, with earnings per share (EPS) a loss of 1p. Buying shares in unprofitable companies can be very lucrative, but it comes with a high probability of starting at a loss, particularly if the price-to-book (P/B) ratio is high. In the case of Atlantic Lithium, it is five times the company's market capitalisation per share.
Looking back, the ratio has been declining, from 14.5x in 2022. It will likely take another two years before the company is profitable and the price-to-book ratio reaches a 1:1 equilibrium. The stock price could go up or down in that time, so I plan to buy small amounts of shares each month. That way, I'll achieve a better average price per share.
This is certainly a long-term bet that could face several obstacles on the road to success, but that's the beauty of penny stocks: they offer an interesting combination of risk and reward!