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Penny stocks are notoriously volatile and risky. But they can also increase my portfolio returns due to their small size.
One stock that has caught my eye recently is Seraphim Space Investment Trust (LSE:SSIT). This is a venture fund focused on space technology that went public at 100p exactly two years ago.
Currently, the trust has a market capitalization of £71m and shares trade at 29p each. So we’ve seen a 71% drop since the stock debuted in the market.
This is why I picked it up today.
The growing global aerospace market
McKinsey predicts the global space economy will grow from about $447 billion today to $1 trillion by 2030.
Elon Musk’s SpaceX continues to dramatically lower the cost of launching satellites and accessing space. As a result, the number of active satellites could triple in the next decade.
Seraphim Space’s goal is to profit from this enormous growth by identifying and investing in early-stage space technology companies from inception to exit.
Since 2016, he has supported 100 companies that have collectively raised $2.2 billion in equity funding for an aggregated company value of over $10 billion. This, the company says, makes him the world’s most prolific space investor.
The total portfolio value is estimated at £220 million, however, as noted, the trust’s market capitalization is only £71 million. That means the stock is trading at a 67% discount to the underlying net asset value (NAV).
In response to this, the company has asked Morgan Stanley to buy back 35,883,800 common shares.
Stock buybacks are widely used by investment trusts when trying to narrow the gap between the share price and asset value.
In its recent trade update, the fund listed a number of positive portfolio developments over the year to June 30, 2023:
Eleven of his companies managed to close investment rounds. Most of the rounds were led by new external investors, with participating funds in two-thirds of them. It kept six of its investments at a higher valuation compared to the previous round, versus just one at a lower valuation.
Conclusively, it is said that the £35 million in place can support the fundraising requirements of his portfolio over the next 12 to 18 months.
It currently has 29 investments, most of which are satellite focused companies in one way or another.
These are the top 10 holdings, as of March 31:
Source: Seraphim Space Investment Trust
I love this stock
Of course, some trust investments are doomed to failure, as are venture capital funds. But I do hope that some of the investment may turn out to be worthwhile over time. It’s going to be one that drives portfolio returns – and hopefully shareholders.
In terms of a massive 67% discount, I think that could offer me a margin of safety. The recently announced share buyback program could help narrow the gap, though it’s not guaranteed.
Plus, the company’s capital remains good and is able to continue to support its young companies.
While I will never make penny stocks into the top spot, this trust will give my portfolio unique exposure to the global growth of the space economy. If I had spare cash to invest I would buy today.