Top 10 ASX penny stocks for traders

What are penny stocks?

Penny stocks represent small, high risk and high reward opportunities for investors, speculators and traders.

As the name would suggest, penny stocks tend to be very small companies that often trade for less than US$5 per share (or a little more than $7 AUD). In terms of market capitalisation, to be considered a penny stock you’re looking at anything from a few million to the upper-end of a billion.

Apart from being small, ASX penny stocks are often thinly traded, loss-making, considered speculative in nature, have limited analyst coverage and as a result: are usually significantly riskier than their mid and large-cap counterparts.

With that in mind, investors should never invest more than they are willing (or able to loss) when trading penny stocks.

Penny stocks are often interchangeably referred to as: micro-cap stocks, small-cap stocks, and nano-cap stocks.

In saying all this, spotting a winning penny stock early can provide significant rewards to patient and risk tolerant investors. The lack of analyst coverage and liquidity may prove especially fortuitous: spotting value where other investors are afraid to venture has proven a lucrative strategy for some of the world’s most famous investors.

For example, market darling a2 Milk (ASX: A2M) started its life as a penny stock – trading for just 56 cents in 2015. Yet as the company’s revenue and earnings rose – and as the broader opportunity in China’s IMF market became apparent to yield hungry investors – the company’s stock climbed in-step.

A2 Milk currently trades for $14.17 per share – representing more than a 2,000% increase in value since its 2015 listing – boasting a market capitalisation in excess of $10bn.

Of course, for every A2 success story, there are a string of failed ASX penny stocks that still trade for just pennies – or less.

Top 10 penny stocks on the ASX

Now that we have examined what exactly a penny stock is, we look at some of the ‘Top 10’ penny stocks currently trading on the ASX. The list below is ordered in by category and market capitalisation:

1. Sezzle (SZL)
2. Moneyme (MME)
3. Splitit (SPT)
4. Kycker (KYK)
5. Bubs (BUB)
6. Nuchev (NUC)
7. Paradigm (PAR)
8. Carbon Revolution (CBR)
9. Superloop (SLC)
10. BrainChip (BRN)

^{*Price movement calculated from ASX listing date to Jan-CY20. Prices accurate as of 1/8/2020.}

Sezzle (SZL)

Sezzle (ASX: SZL), like Splitit below, is an up-and-coming player in the BNPL space. With operations primarily focused in North America and Canada – Sezzle – in its short-time as a publicly listed company has already notched up some impressive growth figures.

As part of its most recent quarterly update, the company reported that active merchants had grown by 48.7%, active customers had hit 644,509 and that underlying merchant sales – a key metric for BNPL companies – had reached US$68.8 million – a 64.2% increase from the quarter prior.

Sezzle also recently revealed that it had secured a US$100 million funding facility that it will use to aggressively pursue its global growth agenda.

Moneyme (MME)

Listing on the ASX in mid-December 2019, Moneyme (ASX: MME) describes itself as ‘a digital consumer credit business leveraging our technology platform (the Horizon Technology Platform) and big data analytics to deliver an innovative loan offering to tech-savvy consumers.'

Examining the company’s top and bottom-line metrics, we see that Moneyme is expecting relatively robust growth in FY20.

Here the company noted that it expects pro forma forecasted revenue for FY20 of $45.8 million – significantly up from FY19 revenues of $31.9 million. Earnings (EBITDA) are also expected to come in strong on a pro forma basis, anticipated to reach $2.9 million in FY20 – up from a loss of $1.2 million in the 2019 fiscal year.

Splitit (SPT)

Splitit (ASX: SPT) is an exciting micro-cap player in the fast-growing buy now pay later (BNPL) space. On its website, Splitit describes itself as the ‘only global cross-border payment solution enabling customers to pay for purchases with an existing debit or credit card.’

Like Afterpay and Zip – these payments are made ‘by splitting the purchase into fee and interest-free monthly instalments, without the need for registration, application or approval.’

Proving that there may be room for many players in the BNPL space, Splitit’s latest quarterly update revealed a strong set of growth figures: customers have reached 235,000, transaction volume hit USD$30,500,000 and merchant fees rose to US$460,000.

Kycker (KYK)

Kycker (ASX: KYK) is a 'technology and data specialist providing Know Your Customer (KYC) solutions through global real-time client verification, helping prevent money laundering and financial crime.'

In an age where the likes of Westpac (ASX: WBC) are alleged to have breached the AML/CTF Act on 23 million separate occasions, it is little wonder that companies like Kycker have popped up.

Though the company’s share price has proven volatile in the last few months – it rose as much as 90% earlier in the year after it was revealed that billionaire Richard White of WiseTech fame, had become a cornerstone investor in the company.

Bubs (BUB)

Bubs (ASX: BUB) is an up-and-coming infant formula company, specialising in goat milk-based products.

Seeing explosive revenue growth in FY19 – the Bubs share price more than doubled during CY19.

Finally, the company recently reported that it had finalised a $30 million capital raise in mid-December. Funds from the raise are anticipated to be used to 'accelerate customers acquisition in existing and new markets, advance new product development and meet M&A commitments reflective of the scale we want to achieve and the surrounding market environment.'

An additional $5 million in funds were raised through an SPP at the end of December.

Nuchev (NUC)

Like Bubs, Nuchev (ASX: NUC) is a 'globally-orientated food business with a dedicated focus on developing, marketing and selling a range of premium Australian made goat nutritional products.'

Founded by Ben Dingle – a co-founder himself of Synlait Milk (a key partner of A2 Milk), the company is pursuing the significant opportunity around of the global infant formula market.

Looking at its fundamentals, Nuchev remains loss making and is expected to stay as such into FY20. In saying that, revenue has trended up nicely in recent years.

Here, top-line growth has proven impressive in in the last three fiscal periods, with Nuchev’s revenue rising from $2.5 million in FY17 to $9.5 million in FY19. Revenues are expected to hit $18.0 million in FY20.

Paradigm (PAR)

An ASX-listed biotechnology company, Paradigm (ASX: PAR) is centrally involved in 'repurposing Pentosan Polysulfate Sodium (PPS), an FDA-approved drug that has a long track record of safely treating inflammation over sixty years.'

Paradigm views the addressable PPS market as 31 million strong in North America alone. Building on such figures, it was likely this sizeable North American opportunity – revealed as part of the company’s 2019 AGM – that spurred the recent investor bullishness, as detailed in the chart below.

Specifically, with only 10% market penetration and at the lowest indicative pricing levels, Paradigm (ASX: PAR) estimates the potential revenue opportunity at US$6.2bn – per annum. At 30% market penetration, the company estimates potential revenues of US$18.6bn, per annum.

For the US market, the company is aiming to have obtained the relevant approvals in 2021. For the Australian market, the companying is aiming to have obtained the relevant provisional approvals in 2020.

Carbon Revolution (CBR)

Listing on the ASX in late 2019, Carbon Revolution (ASX: CBR) a lightweight wheels manufacturer focused on the luxury market.

With grand ambitions, CBR has already seen its revenue grow from $8.110 million in FY18 to $15.068 million in FY19.

Maybe more impressively the company is forecasting that its revenue will hit $62.2 million in FY20. These lofty forecasts, says the company, will be driven by 'wheel sales and associated engineering services and customer-owned tooling.'

Carbon Revolution remained loss making in FY19.

Superloop (SLC)

In a world where data is increasingly important, it’s unsurprising that Superloop (ASX: SLC), a company centrally involved in the provision of telecommunication infrastructure and connectivity services across Australia, Singapore and Hong Kong – is liked by institutional players.

Indeed, one of the few companies on this list with analyst coverage – Superloop (SLC) currently has an overweight (OW) rating from JP Morgan and a significant share price target of $1.20. At Superloop’s current price levels, JP’s price target would imply potential upside of 30%.

Brainchip (BRN)

One of the potentially most intriguing tech stocks on the ASX, BrainChip (ASX: BRN) is centrally involved in the development of artificial intelligence technology software and hardware.

Specifically, as the company notes: ‘Our technology learns from experience, autonomously, just like a human. Deep Learning networks are power-hungry and require large GPU-Server clusters and weeks of training.’

The prospect of this science fiction-sounding technology has made Brainchip a decisive stock over the years – with the company’s share price all-time-highs reaching the 35-cent mark in 2016.

Even with this volatility, some top Australian analysts continue to like the stock.

How to identify and pick the best penny stocks in Australia

Regardless of whether you take a short or long-term approach to trading or investing, knowing how to consistently identify and pick the best ASX penny stocks has the number of key benefits. Here’s how to pick the best penny stocks in Australia:

• Start by eliminating mid and large-cap companies. Any stocks with a market capitalisation below $1 billion is typically considered a penny stock.
• Analyse the company’s share price history. Next, you want to see if a company’s share price is low because it’s a relatively young company – or if it’s an old company that has witnessed significant decline.
• Examine the fundamentals: in line with the above point, is the company growing its revenues or are they declining? If the company is currently loss-making (as many ASX penny stocks are) read up on management commentary: is there a clear path to profitability? To growth?
• Are there positive or negative macro conditions at play? For example, investors may potentially want to avoid penny stocks dabbling in iron ore given the current commodity outlook. That’s not to say that out-of-favour sectors aren’t capable of providing investors with market-beating returns, only that it is often preferable to look for companies in sectors that are poised to grow – not decline.

How to trade penny stocks in Australia

Now that you’re familiar with some of Australia’s most promising penny stocks and how to pick and identify them, below we look at how you can trade them for yourself.

How to trade penny stocks in Australia

Besides buying the ‘Top 10’ ASX penny stocks we have discussed today, IG’s trading platform also gives more risk tolerate investors and traders the flexibility to go LONG and SHORT – utilising CFDs – to potentially capitalise on the underlying price movements of an asset.

Importantly, as a leveraged product, while CFDs give investors the chance to maximise their trading gains, it also gives them the chance to maximise their losses.

To begin trading penny stocks, simply:

• Create an IG Bank trading account or log in to your existing account
• Look for the ASX penny stock you would like to take a short or long position in
• Choose your position size
• Click on ‘sell’ or ‘buy’ in the deal ticket
• Confirm the trade

Penny stocks summed up

As we noted at the start: investing in ASX penny stocks can be an exhilarating experience. A great penny stock can help investors multiply their money many times over – far outpacing the gains an investor is likely to witness from a large-cap stock.

The likes of Afterpay (ASX: APT), WiseTech WiseTech (ASX: WTC) and a2 Milk (A2M) come to mind when one thinks of ASX penny stocks that have successfully transitioned from obscurity into the limelight.

The risks and rewards of ASX penny stocks

Yet for every market darling that has made it to the top: there are a string of no-name failures. In some cases, investors lost some – or in extreme cases – all of their capital investing in penny stocks.

The line between going big or going bust seems most apparent in the micro-cap market.

As such, investors should take extra caution when investing in ASX penny stocks, thoroughly research any promising opportunities themselves, and never invest more than they are willing or able to lose.

Not ready to start trading real stocks but still eager to get involved in the markets?

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