Penny stocks are thought of negatively by many investors because of the potential for fraud and manipulation. Because most penny stocks trade on pink sheets, oversight and disclosure tends to be elusive at best. These sorts of penny stocks are to be avoided at all costs.
That said, penny stocks should not be avoided entirely. Many penny stocks are legitimate companies that trade on legitimate exchanges. For whatever reason, these stocks trade below $5 per share, making them penny stocks according to the Securities and Exchange Commission.
In the biotech space, very real companies with exciting prospects fail to attract investors. The reasons are simply that these biotech penny stocks are losing money on an operating basis. The research-and-development nature of these companies dictate that profits come later. In an unforgiving market, these biotech penny stocks trade below $5 until they can prove beyond a shadow of a doubt that they can be profitable.
The time to buy these stocks is before that happens. Here are four biotech penny stocks to consider for your portfolio:
AEterna Zentaris (NASDAQ:AEZS) has a market capitalization of $170 million, and the volume of shares traded daily is strong. Those are positive attributes that indicate there might be more to this biotech penny stock than meets the eye. The company is a late-stage drug development company that is focused on the cancer treatment market.
Shares are up this year even after multiple days of selling in the market. AEterna has gained 3.5% so far this year. As one might expect, the company is losing money, but the losses are expected to be smaller in the coming year. Given the promise of its drugs and the proximity to actually coming to market, the risk/reward is strong. I would buy this biotech penny stock.
Stem-cell research might be controversial from a political standpoint, but the promise of treatments using stem cells is undeniably strong. Aastrom Biosciences (NASDAQ:ASTM) is primarily focused on developing stem-cell, patient-specific therapy for the treatment of critical limb ischemia. Currently in phase II testing with mixed results, the company is negotiating with the FDA with respect to phase III trials.
Drug companies are roller coasters. Making it through the ride and bringing a drug to market can result in huge returns for investors. With Aastrom currently depressed, buying today represents a good entry point for new investors. The stock is down nearly 4% year-to-date, holding up better than many other small-cap stocks this year. It might take some time for the test phase to be complete, but should the company prove successful in its treatment, the stock is an easy double from here.
PharmAthene (AMEX:PIP) is in the business of biodefense. The company specializes in developing vaccines to combat biological and chemical weapons. As a partner of the Department of Defense, this biotech penny stock is very much for real. It also is critical given where defense spending is likely to be headed. Big, old-line defense contractors might see cuts because of budgetary constraints, but biodefense should be unscathed.
The stock has been hammered this year, but that is after a big run-up in price at the end of 2010. Shares are down 46% in 2011. With the U.S. government relationship acting as a natural floor for this stock, I would use the discount as an opportunity to buy shares on the cheap. Analysts expect the company to get close to break-even in 2012. Buy before the market catches on.
AdventRX Pharmaceuticals (AMEX:ANX) is an interesting biotech penny stock with a unique twist to the drug and treatment market. Instead of developing new drugs, the company takes existing drugs and makes tweaks to decrease the risks of the drugs without negatively impacting efficacy. This lower-cost model works well if the company can prove the concept. If not, there is no research and development that will save the day for investors.
Currently, AdventRX has one drug that it hopes to bring to market in the near future. With some $47 million in cash on hand at the end of the first quarter, there should be enough money there to see where this drug goes in the market. Success there opens the door to other drugs that also could be tweaked. This company is an example of making the market more efficient. I like this biotech penny stock for that reason alone. It is worth taking the risk to see if it can prove the model.