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Top 10 ASX penny stocks for traders to watch

A brief examination of ASX penny stocks, their advantages and drawbacks, and a rundown of 10 of the best penny stocks to watch.

Source: Bloomberg

ASX penny stocks: what you need to know

Penny stock investing requires a high degree of due diligence, as they represent smaller propositions that usually come with a far higher risk-to-reward ratio.

In the UK, a penny stock is defined as any share worth less than £1 each. In the US it’s any under US$5 (circa AUD$7).

In Australia, many classify penny stocks as those under one Australian dollar per share, while some use the definition loosely to describe any company with smaller share prices.

It’s also worth noting that penny stocks can have high-value market caps if large numbers of shares have been issued.

The top 10 ASX penny stocks to watch

Here is a list of ten of the top ASX penny stocks to watch for those investors who are interested in the potential high returns that they offer.

  1. Lion Energy Ltd (ASX: LIO)
  2. Prescient Therapeutics (ASX: PTX)
  3. Peak Rare Earths Ltd (ASX: PEK)
  4. Brainchip Holding (ASX: BRN)
  5. Bubs Australia (ASX:BUB)
  6. Tesserent Limited (ASX: TNT)
  7. Vection Technologies Ltd (ASX: VR1)
  8. Air New Zealand (ASX: AIZ)
  9. Airtasker (ASX:ART)
  10. Paladin Energy (ASX: PDN)

Lion Energy Ltd (ASX: LIO)

Lion Energy Limited current focus is the creation of a hydrogen generation and refuelling hub in the Port of Brisbane, for the provision of hydrogen to heavy mobility fleets, including domestic public buses trucks and heavy-duty transportation equipment in the construction and mining sectors.

The company just saw a leap in its share price on the back of news it had obtained planning approval from the Queensland State Government for the hydrogen hub project. Lion could have upward potential in its share price of hydrogen emerges as a widely accepted form of clean energy in Australia.

Prescient Therapeutics (ASX: PTX)

Biotech company Prescient Therapeutics Limited focuses on personalised cancer treatments that make use of cellular and targeted therapies. The company's technologies hail from world-class research centres including Yale, Penn and Oxford, and have already led to the production of FDA-approved therapies.

PTX has the exclusive rights to two next-generation cell therapy platform technologies – OmniCAR and CellPryme.

Peak Rare Earths Ltd (ASX: PEK)

Peak Resources Ltd recently saw its share price rise on the release of a final set of assay results for its exploration of the multi-commodity potential of the Ngualla carbonatite system.

Peak Rare Earth say the results indicate that the Breccia Zone is host to high-grade thick intercepts of fluorspar, as well as high-grade rare earth mineralisation and elevated levels of niobium.

Rare earth plays in general stand to gain in the near-future from the growing popularity of electric vehicles and renewable energy devices, as climate change becomes a more pressing issue for consumers.

Brainchip Holding (ASX: BRN)

Artificial intelligence company BrainChip Holdings Limited claims to have developed the first neuromorphic processor to reach the market. Its Akida neural processor mimics the human brain to analyse sensory data at the point of acquisition, which BRN says achieves unprecedented precision and efficiency.

BRN's share price could benefit in general from the buzz surrounding AI following the release of ChatGPT.

Bubs Australia (ASX:BUB)

Baby formula company Bubs Australia Limited touts its use of high-quality ingredients sourced from organic suppliers and growers as a key reason behind its status as a premium brand.

The company has won international accolades for product quality, including a Purity Award from the Clean Label Project in the US for ingredient quality and a First 1,000 Days Promise award for compliance with EU baby food regulations.

Tesserent Limited (ASX: TNT)

Tesserent Limited is a cybersecurity company that provides a range of cybersecurity services to businesses in Australia and New Zealand. The company's services include threat intelligence, network security, and compliance and governance.

Tesserent has some of Australia's top security experts at its disposal, having recently appointed Anthony Sheehan, the former Deputy Director-General with the Australian Security Intelligence Organisation (ASIO), as a non-executive director.

Vection Technologies Ltd (ASX: VR1)

Vection is a software company that develops virtual and augmented reality solutions for businesses. The company's products include real-time 3D rendering software, virtual and augmented reality platforms, and training and simulation solutions.

Vection recently obtained several patents across the US and Europe related to its INTEGRATEDXR technology stack, as well as obtained a $1 million defence pilot order from a global defence contractor.

Air New Zealand (ASX: AIZ)

New Zealand's flag carrier airline operates Air New Zealand Limited scheduled passenger flights to 20 domestic destinations, as well as 30 international destinations in 18 countries situated mainly within the Asia-Pacific.

Air New Zealand recently obtained regulatory approval from the New Zealand government for a 5-year extension of its joint-venture with Singapore Airlines, helping to maintain its presence in the highly important ASEAN regional market.

Airtasker Ltd (ASX: ART)

Penny stock Airtasker Limited recently released performance results indicating that its lean business model has enabled it to achieve such high margins that it's managed to convert weill over 90% of revenues into gross profits.

Airtasker's FY24 first half results show that gross profit margins were 94.4% for the six months to December 2022, and that this figure further increased to 95.7% in HY24.

Group revenue has risen by 6.8% to $23.3 million.

The impressive revenue and profit margin results put the company in a strong position to driver further growth, particularly given what appears to be a highly efficient business model.

Paladin Energy (ASX: PDN)

Headquartered in the Western Australian capital of Perth, Paladin Energy Ltd is an independent tier-one producer and explorer of uranium. The company holds a 75% interest in the Langer Heinrich Mine (LHM) in Namibia, considered a globally significant uranium source.

LHM's long-life operations have produced over 43 million pounds of triuranium octoxide. PDN expects its flagship mine to return to production by Q1 CY2024.

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ASX penny stocks: further important information

ASX penny stocks are often thinly traded. This means that unlike the blue-chip shares of the ASX 200, where every stock usually has a wall of potential buyers, there may not always be enough buyer demand when investors want to sell.

In addition, penny stocks are often loss-making, using any money available to invest in growth. This makes them highly speculative investments. Moreover, they usually receive little to no analyst coverage, making truly informed trading decisions difficult.

They can also even lack in-depth trading records. And some penny stocks are notorious for diluting stock value by issuing additional shares.

These risk factors mean that for most investors penny stocks should only form a small percentage of one’s portfolio. And for those closer to retirement who are investing over short timeframes, they arguably should be avoided altogether.

Of course, despite these significant risks, ASX penny stocks hold a unique advantage. The right pick can be massively more lucrative than an investment in more established peers.

However, it’s important to beware of the echo chamber of success. Skyrocketing penny stocks are extremely likely to hit mainstream news, but the success stories are significantly outnumbered by the failures. Moreover, once an ASX penny stock hits the headlines, it's often too late to partake in its success.

But many of the largest blue-chip stocks on the ASX began trading as penny stocks. For example, the largest stock on the ASX, BHP, used to be a penny stock back in 1999. Afterpay was a penny stock as recently as 2017. International market titans Apple and Amazon also once qualified as penny stocks for the investors with the foresight and luck to invest early.

However, even if an investor buys into a successful penny stock at an early stage, they can only experience the full financial benefit if they continue to retain their shareholding, even after it has doubled, tripled, or even exploded in value.

And psychologically, investors must also be confident that others will hold their shares, as it only takes relatively few sellers to depress a penny stock’s share price.

This is complicated by the hallmark thin trading; a penny stock that has just doubled in price may not have enough buyers if too many are selling at the same time. This all requires extremely high conviction.

For this reason, an ASX penny stock must have a solid investment case that remains strong regardless of volatile share price movement. For example, this could include new technology, like Apple’s iPhone, a unique idea, such as Amazon’s approach to online shopping, or even something as banal as exclusive rights to a mining project.

But it’s also important to note the positives. When a company is small, it can be easier to grow quickly, while larger companies eventually reach a growth rate ceiling. And ASX penny stocks offer retail investors the ability to buy large numbers of shares for relatively little money.

This means an investor can benefit from the potentially rapid growth of a large number of penny shares across multiple sectors, whilst also keeping the high-risk investments as only a small percentage of their overall portfolio.

In the current economic environment, many penny stocks are struggling to access finance as investors flood to blue chips. Of course, this elevates the risk-reward ratio even higher, as some are now available at a discount compared to relative risk.

In summary, ASX penny stocks usually constitute highly risky investments with the potential to deliver supersized returns.

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