Michael Burry’s company, Scion Asset Management filed its 13F last night, revealing the company’s portfolio as of the end of 2021. Burry is best known for betting against the housing market in 2008, and more recently, against Elon Musk’s Tesla Motors and Cathie Wood’s ARK Innovation ETF.

I like following the 13F reports of investors that I admire. Doing so lets me see exactly what they’ve been buying and selling. It also allows me to try and figure out what they’re thinking about the stock market and investing more generally. By learning from those that I look up to, I hope to improve my own thinking. Here is what I took from Burry’s 13F.

Burry’s 13F

Towards the end of last year, Michael Burry opened new positions in Bristol-Myers Squibb, General Dynamics, Fidelity National Financial, and AEA-Bridges Impact Corp. He also sold out of positions in Lockheed Martin, NOW, and SCYNEX. In addition, Burry’s 13F revealed that Scion had added to an existing position in CoreCivic and reduced a position in the GEO Group.

I found it noteworthy that Burry’s 13F didn’t include any options contracts. Recent 13Fs from Scion have disclosed Burry’s use of options contracts to make short-term bets on certain stocks. The most recent filing indicates that there were none of these open at the end of last year.

It’s important to note that Scion’s 13F only reports on the US portion of Burry’s investment portfolio. A good amount of Burry’s overall exposure is elsewhere, with significant investment in companies listed in the UK such as Imperial Brands. Even though Burry’s 13F only tells us part of the story, I believe it reveals important insights.

Here today, gone tomorrow

Burry’s 13F revealed that investments that Scion had made in Q3 had been sold by the end of Q4. Investments in Lockheed Martin, NOW, and Scynexis that appeared as new additions on Scion’s 13F from Q3 no longer appear on the company’s Q4 report. This tells me that I should be very wary of reading too much into the fact that Burry bought shares in Bristol-Myers Squibb (which I own). Scion might, for all I know, have already sold them and replaced them with other investments, as it did with Lockheed Martin (which I also own).

Value

The obvious feature that all of Burry’s holdings have in common is that they trade on low price-to-earnings (P/E) multiples. Burry has been active on Twitter, forecasting turbulence in the stock market as a result of rising inflation. Scion’s limited exposure to US stocks, combined with the tilt towards value, indicates to me that Burry is still proceeding with caution.

Conclusion

I view Michael Burry as an extremely sophisticated, intelligent, and thoughtful investor. I think that Scion’s 13F can tell me quite a bit. This is true even if I don’t attribute much significance to the particular holdings in Burry’s portfolio. The absence of any options contracts, the clear bias towards stocks trading on low valuations, and the limited overall exposure to the US indicate to me that Burry is keeping cash on the sidelines and treating the market with caution.

Stephen Wright owns Bristol-Myers Squibb and Lockheed Martin. The Motley Fool UK has recommended Imperial Brands and Lockheed Martin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With tensions on the Ukrainian border growing each day, the threat of a stock market crash seems ever closer. Experience of past cycles tells me that, in uncertain times, risk appetite falls and investors gravitate towards larger companies with proven track records. Should I follow the herd and seek refuge in blue chip stocks?

The much-talked-about return to “value” stocks is a popular trend, and I decided to take a good look at some of the largest companies around the world – and in particular FTSE 100 shares that could be a good refuge for my portfolio in the dark days to come.

The first shock for me was to find out that so few of our prized UK companies are relevant in a global context. Out of the top 100 listed companies in the world (by stock market value), only four are found within the ranks of the FTSE 100.

Even these four have slightly tenuous links to the UK.

Banking giant HSBC (LSE: HSBA) moved its headquarters to the UK back in 1993, while Shell moved from the Netherlands only last month. AstraZeneca, of course, has a strong UK presence, but Linde has its origins in Germany and the US.

Changing the goalposts and looking at the same top 100 by earnings, only a slightly better picture emerges for the UK. Linde drops out, but HSBC, BP, Liberty Global (LSE: 0XHR) and AstraZeneca all figure in this league table.

This is clear evidence that the UK has lost out during the tech boom over the past 25 years, but perhaps this is what may make our shares a better refuge for the tough times ahead?

According to Bloomberg, the FTSE 100 currently trades on a price earnings ratio of around 16 times and has a dividend yield of around 3.3%.

This appears better value than the US markets — with the tech-heavy NASDAQ 100, for example, trading at over 33 times earnings. This looks pricey, at a time when questions are being raised over the future growth in profitability of some tech stocks.

Of the UK “refuge” stocks available, I particularly like the look of HSBC and Liberty Global.

With a trend of increasing interest rates, banks will (as in previous cycles) surely benefit, and strong full year 2021 results are forecast to be reported by HSBC later on this month. It should, however, be noted that this strong rebound in performance will be due to a degree by the release of large credit provisions, which were put in place by the company during the early stages of the pandemic.  

Liberty Global, in my opinion, has a strong business model and I like the way it is investing heavily in its key markets.

Management clearly think it is undervalued and have committed up to $1.4bn to a share buyback programme in the 2021 financial year. Liberty’s commitment to fixed and mobile communications convergence is something I’ve bought into on a personal basis, and the operator of the Virgin/O2 platform in the UK looks a good future bet.

The telecoms sector is, however, extremely competitive and other players, such as Sky and Vodafone in the UK, will need to be watched carefully.

Fergus Mackintosh does not have a position in any of the companies mentioned. The Motley Fool UK has recommended HSBC Holdings and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Aberdeen is known as the Granite City. But it does not take a heart of stone to be unimpressed when looking at the recent performance of financial services giant Abrdn (LSE: ABDN). The Abrdn share price has sunk 28% in a year.

Could this present an attractive opportunity for me to add the company to my portfolio?

Behind the fall

I think the decline in the share price reflects long-standing concerns about the company’s business model and its ability to execute. Over a five-year period, the share price has fallen 43%. The financial services industry is highly competitive. At the interim stage, although the company reported increased adjusted pre-tax profit, assets under management fell. That suggests customers are not sufficiently attracted by what they feel the company offers them. I think that could continue to be a challenge in the future too, especially with the company’s adoption of its new name that attracted criticism for dropping the vowels.

But I think the share price fall overshadows some of the strengths of the business. Last year the company posted earnings per share of 38.5p. That was its best performance for years. It also means that Abrdn’s price-to-earnings ratio now stands at just over six. That looks cheap to me if the company is able to show continued strength in its business performance.       

Yield appeal

After its share price fall, the company offers a dividend yield of 6%. That is not exceptional for a financial services provider – M&G and Direct Line offer higher dividends, for example. But it is still an attractive dividend in my view.

Admittedly the dividend has been going in the wrong direction. The final dividend was halved in 2020 and this year’s interim payout was kept flat. But the company reckons the dividend cut has made it sustainable. It has also said it plans to start growing the payout once it is covered 1.5 times by adjusted capital generation. I regard that as a fuzzy measure. But at least there is the prospect of future rises. 

For now, the message is that the company is not looking to cut its dividend again. That could still happen, of course: these payouts are never guaranteed. But if they are maintained, then by buying at the current Abrdn share price, I should get a 6% yield. That could make the shares an attractive addition to my portfolio.

I am attracted by the Abrdn share price

The share price has traded close to its 12-month low in recent days. But I think recent business performance has been good in terms of profitability, the valuation looks attractive and the yield also appeals to me.

I do see ongoing risks here. The decline in assets under management could point to customer concerns about the skills of the company’s investment managers. That could hurt revenues and profits in future.

But I also see opportunity. At the current Abrdn share price, I would consider buying the stock for my portfolio.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The very best days seem to be behind mining stocks for now. They were the dividend stars from among FTSE 100 stocks last year (and even now, their dividend yields are among the highest). But this year might not be quite as good as commodity demand eases. I have held all FTSE 100 miners in my portfolio for some time now, save BHP, which was just delisted from the London Stock Exchange anyway. They have all done well, and I am still invested in most of them, save one. I am talking about Glencore (LSE: GLEN).

Competitive market valuation 

So why am I talking about it now? It so happens, that the miner is one of the newsiest stocks around today after it released an impressive set of earnings. This has led me to reconsider if I might want to buy it again. Consider this: one big reason why I sold it was that I just did not see enough upside to it at the time. 

It has a price-to-earnings (P/E) ratio of around 35 times. This is way ahead of that of its mining peers. Rio Tinto, has a P/E of 6.7 times, for instance. And Anglo American is at 9 times. After its results, however, Glencore’s P/E has moderated to a little over 15 times, which makes it far more competitive again. Moreover, it is now less than the FTSE 100 average of 18 times. It also intends to return $4bn to shareholders through share buybacks. That is likely to push up its share price further, because a buyback reduces the number of shares in circulation. 

Glencore hopes for resolution

I also like the fact that the company hopes to find a resolution to corruption and bribery charges it has faced in recent years. These held back the stock’s price even while other FTSE 100 miners did better before the pandemic. If it is able to move forward from these charges now, the I reckon its share price could see even better times ahead. 

Why the FTSE 100 stock might still be overpriced

However, I do still wonder about how much the stock can rise. Even with the decline in P/E, it is still higher than its peers. So unless there is reason to believe that it could outperform them, the case for its share price increase weakens a bit considering this. Glencore is optimistic about the prices of the commodities it trades though, based on expected supply disruptions. But it does not say a whole lot about this in its update.  

What I’d do

On the whole, I think there is a case for the Glencore share price to rise over time. Maybe not a whole lot in 2022, but it could still be a company to buy for the long term as a robust mining stock. This is especially so if it is indeed able to resolve its regulatory issues. I will quite likely buy it this year, possibly on a dip though. 

Manika Premsingh owns Anglo American and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Although a lot of people like the idea of effortless earnings, I think it does take a bit of work to turn the idea into reality. One of my favourite passive income streams is dividends from shares. I like that because I do not need to do anything once I have bought the shares, and it does not need a lot of money to begin earning.

If I wanted to set up such passive income streams from scratch, here is how I would go about it with £35 a week.

Step one: get into a habit

My first move would be to start putting aside £35 a week – right now. That could be in the form of saving cash, or setting up a regular electronic transfer. Either way, I think it would be important to get into a regular habit of putting aside the money each week. With that sort of discipline, I feel I would be less likely to wobble when other spending priorities popped up.

Why does that matter? Basically, my plan is to invest in dividend shares and the more money I invest, the higher my likely return will be.

Step two: identify the right shares for me

There are a lot of shares out there, but only some pay dividends. Even those that do are not guaranteed to keep paying them in future. To reduce the risk from any one share, I would be looking to build a portfolio of dividend shares diversified across different companies and business areas.

How would I pick these shares? I would hunt for companies with business models I thought could generate substantial free cash flows in future. That matters because cash flow is ultimately what allows a company to keep paying dividends. To identify companies that could hopefully keep generating free cash flows in future, I would look for a sustainable competitive advantage. For example, Tesco is the UK’s leading retailer. Its large estate of shops is something it would be hard for a competitor to recreate. Online shopping could dent sales – but Tesco has been aggressively growing its own online sales. So that makes me think it could continue to generate sizeable profits for years to come. That could help the retailer fund its dividend.

I think it is important to focus on my own situation. The shares that are right for other investors might not suit my own investment objectives or risk tolerance. So, for example, I hold the digital ad agency S4 Capital in my portfolio. But if my objective was purely passive income, a growth share like that, which does not pay dividends, may not be suitable. Instead, I would focus on shares paying dividends – and that I reckoned could keep doing so.

Step three: start generating passive income

Identifying the right shares for me is not enough to start generating passive income. That will only happen when I actually start buying them.

With £35 a week, it will probably take me some months before I have enough funds to buy a diversified portfolio of shares. I would use that time to save. I would also set up a share-dealing account or a Stocks and Shares ISA. While waiting, I could begin the hunt for dividend shares that might be ideal for my passive income plan.

Christopher Ruane owns shares in S4 Capital. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m searching for the best FTSE 100 dividend stocks to buy for my portfolio. I think these top-class income stocks could be too good to miss at current prices.

Getting in on the green revolution

I reckon profits at Glencore (LSE: GLEN) could leap as investment in green technology increases. This dividend stock — which yields an impressive 7.4% for 2022 — produces copper, cobalt, zinc, nickel and ferroalloys. Demand for these metals looks set to take off as investment in green infrastructure, electric vehicles, wind turbines and the like takes off.

On the other side of the coin, Glencore is also involved in the production of fossil fuels. I’m encouraged by recent news that activist investor Bluebell Capital is pushing for the firm to divest its thermal coal operations. But as things stand, it still exposes investors to some risk as the world switches from oil and coal to renewable sources. 

Today Glencore trades on a forward price-to-earnings (P/E) ratio of 7.1 times. This is comfortably inside the widely-accepted ‘good value’ watermark of 10 times and below. And it makes the company a top buy for me, despite all this issues, I feel.

Another FTSE 100 bargain

Our addiction to our smartphones illustrates why Vodafone Group might be one of the best FTSE 100 stocks to buy as consumer spending comes under pressure. Our need to stay connected means people will cut back on essentials to pay for their mobile and broadband services. An Ofcom report released today showed that people have indeed reduced spending on food and clothes in order to continue paying for communications services.

I don’t just think Vodafone is a great buy for the near term, however. The steady rollout of 5G offers brilliant sales opportunities in the years ahead, for example, as does the company’s telecoms and mobile money operations in Africa.

I’d buy Vodafone, despite the highly-regulated nature of its services and the threat this could pose to future profits. I think it offers all-round value that could be too good to miss. The business currently trades on a forward price-to-earnings growth (PEG) ratio of 0.5 and packs a 5.5% dividend yield.

9.5% dividend yield!

I think that having exposure to gold is a good idea as geopolitical fears grow. And I think that buying UK shares is the best way to go about it. Such a strategy allows me to benefit from rising metal prices whilst receiving a dividend in the process. I’d do this by investing in FTSE 100 share Polymetal International (LSE: POLY). The yield here sits at an impressive 9.5%.

Safe-haven buying has pushed gold prices steadily higher in recent weeks and it just hit three-month highs. It’s no coincidence that Polymetal’s share price has also moved higher, either. Yet despite these gains the gold digger still trades on a rock-bottom P/E ratio of 6.9 times for 2022.

I think a combination of fears over the Ukraine crisis and soaring inflation could well push yellow metal prices to fresh record highs in the coming months. The current peak sits around $2,070 per ounce struck in summer 2020. I think Polymetal’s a top buy, despite the ever-present risk of production stoppages to its earnings.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Many shares have seen price falls lately – but some more than others. One company has lost 80% of its value since April. Over the past year, the share price has tumbled 79%. Is this a UK share to buy now for my portfolio? Or should I pass over the opportunity?

Fallen star

The share in question is online estate agent Purplebricks (LSE: PURP).

In one way, it is surprising that the shares have fallen so far in the past few months. The UK property market is buoyant. Purplebricks has a well-known brand that should enable it to capitalise on that. Indeed, that remains part of the bull case for the shares.

So, why have the shares fared so poorly recently? Some clues are provided by the company’s interim results, released last month. Revenue, gross profit and cash on hand all fell. A profit in the same period last year fell almost 400% to become a £20m loss. That is around one third of the company’s total market capitalisation.

The company has gone through a painful period during which its business model has been found wanting. Not only did its property sales model cause problems for the firm’s finances, it also identified issues last year in its lettings business. Market confidence in Purplebricks has been shaken and I also think some customers have probably decided to go elsewhere. That could help explain the 7% revenue decline in the first half.

Chance for change

The company has been open about its problems and emphasises the steps it has already taken to address them. Indeed, it says that it has “significantly invested in and transformed its business model” over the past few months. Those changes include a different approach to what it offers customers, as well as how it manages staff. The company said that early signs suggest these changes are improving performance for the better.

If that turns out to be the case, maybe the greatly reduced Purplebricks share price offers a buying opportunity for my portfolio? But I notice that directors are not buying even at the reduced Purplebricks share price, with the last director purchase dating back to last April. That makes me question how much confidence they have in the turnaround story. 

Should I buy?

My main concern here is precisely the fact that Purplebricks has become a “turnaround” situation. With booming demand for homes, the past year ought to have been a great time for the company. Instead, management failures and misjudgements have hurt the business badly. We have seen management changes and a shift in strategy.

That could help Purplebricks recover. But generally I see turnaround situations as risky. Personnel changes and the possibility of reputational damage can permanently scar a company. Purplebricks had already recorded sizeable losses before 2020. The past year has not inspired confidence. I feel. So I will continue to watch Purplebricks to see how its new strategy works. But I will not be buying it for my portfolio.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I have been quite enthusiastic about the prospects for sports retailer JD Sports (LSE: JD), buying it last year for my portfolio. But lately other investors seem cooler on the company. The JD Sports share price has fallen over 20% this year and is up only 1% over the past 12 months.

What is behind the fall – and what should I do about it?

Strong performance

Last month the company issued a trading update. It said that revenues for the past five months or so were up 10% compared to the same period in the prior year. The company also maintained its gross profit margins, despite supply chain disruptions.

In fact, not only did the company say performance was strong, it actually upgraded headline pre-tax profit forecasts for the full year. The market was expecting around £810m and JD said it should surpass that number. Currently the company’s market capitalisation is £9bn. So the JD Sports share price implies a price-to-earnings ratio of around 11. I regard that as a bargain for a company with its proven growth potential.

Lingering concerns

Despite the strong performance, investors have a few concerns about JD Sports right now. Stimulus spending in the US has been a boon for sportswear retailers like this. But with stimulus being wound down, that will not be the case in future. That could hurt revenues. Meanwhile, supply chain inflation risks eating into profit margins.

The company was recently fined by the UK competition authorities in connection with its Footasylum takeover bid, although JD has vigorously defended its actions and criticised the authority’s “use of inflammatory language”. In the long term I see the fine as a storm in a teacup. JD’s ambitious empire-building has ruffled some feathers — but I think it could be good for continued growth prospects at the retailer.

Investor confidence was shaken last month when the company’s chief executive sold just over half his JD shares for around £21m. However, directors sell shares for a variety of reasons. In itself I do not see a share sale as problematic for the company’s investment case. The chief executive continues to own 9.7m shares in the company.

My next move on the JD Sports share price

I keep scratching my head to see if there is something I am missing here. On the one hand, the company’s business performance is going from strength to strength. It has upgraded already high profit forecasts and has a proven formula for success.

But on the other hand, the share price has been sliding notably. I do not see any compelling reason for that. Based on its successful business model and earnings outlook, I continue to see reasons for optimism about the company. To me, after the share price fall, the JD Sports valuation simply looks more attractive than before. So I see the recent fall in the JD Sports share price as a buying opportunity for my portfolio.

Christopher Ruane owns shares in JD Sports. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Consumer internet company Sea Limited (NYSE:SE) has been on a downward slope recently, falling from highs of around $370 in October 2021 to its current price of $130. This has been partly due to the general sell-off of growth stocks, on the back of issues like inflation and rising interest rates. Yesterday, the stock fell another 20%, as its flagship game Free Fire was banned in India. But I think this dip offers a great time for me to buy more Sea shares. Here’s why.

The recent ban

India has banned several apps that have ties to China, citing security concerns. Despite Sea being based in Singapore, it has close ties to Tencent, a Chinese company, and this meant that Free Fire was one of the apps banned. This is a risk for the company, because India was one of the biggest markets for the game.

Even so, I believe that the 20% fall yesterday was a market overreaction. Indeed, India only represents 3% of the gaming sector income for the company. Secondly, I believe there is a high chance that the ban will not last for long. This is because at the date of the ban, Tencent still held Class B shares with special voting shares. Nonetheless, it has since given up these special voting shares, meaning that it is now just an ordinary shareholder. Therefore, Sea’s ties with China are far more limited than it may seem. This will hopefully see the ban overturned, and the share price should be able to recover as a result.

Other factors

It also has far more growth prospects than just Free Fire, a factor I like to see in growth stocks. Indeed, using the profits generated from its gaming sector, it has launched Shopee, an e-commerce company operating around the world. Recently, Shopee has managed to expand into Latin America, Asia, and some parts of Europe. In the third quarter, revenues in the e-commerce sector were also able to reach $1.5bn, a 134% increase year-on-year. This was even higher than the company’s digital entertainment sector.

Such diversification also means that revenues for 2021 are likely to reach around $9bn, which is more than a 100% increase year-on-year. After the recent dip in the share price, this means that it trades at a price-to-sales ratio of around 8. Due to the company’s incredible rates of growth, this seems far too cheap. For example, in the past, it has traded at P/S ratios of around 30. 

Of course, there is the risk that growth may slow in the future, especially as the effects of the pandemic start to wear off.

Will this growth stock recover?

In the short term, several issues continue to face the firm, and the recent ban in India is a reason to feel slightly cautious. Even so, in the long term, I’m far more confident. The growth stock has been expanding all around the world and is capturing multiple unpenetrated markets. Management has also proven adept. Therefore, I believe that this recent dip offers an ideal time to add more Sea shares to my portfolio.

Stuart Blair owns shares in Sea Limited. The Motley Fool UK has recommended Sea Limited. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Penny shares are a volatile section of the stock market. Most of these businesses are tiny for a good reason but, occasionally, a diamond appears in the rough. And it seems Premier African Minerals (LSE:PREM) has recently caught investors’ attention. In fact, the penny stock skyrocketed by over 70% last week.

But is this just short-term excitement from traders, or should I really consider this business for my long-term portfolio? Let’s take a closer look.

Investigating the penny stock

Premier African Minerals is an early-stage exploration company. The group did have active tungsten mines a few years ago. But due to complications with Zimbabwe’s National Indigenisation and Economic Empowerment Fund (NIEEF), they’re no longer active.

Since then, it’s been on the prowl for a new development site, and it may have just found it. Management recently released a drilling update for its Zulu project. After performing early-stage tests, the company has confirmed the presence of lithium starting from a relatively shallow depth of 68 meters and with an average grade between 1.05% and 2.02%.

While the ore grade is pretty standard, the drilling location was selected based on a geological model developed by Shango Solutions. The discovery of lithium indicates the model is accurate. And since it also predicted further deposits northwest of the testing site, the mineral resource estimate could be set to increase considerably.

If that wasn’t enough, management has also signed a non-binding ‘Heads of Terms’ agreement with a lithium manufacturer to fund its Zulu project. With money potentially secured, the presence of lithium confirmed, and a possibly larger than expected deposit, it’s hardly surprising to see why the penny stock exploded on the news.

Taking a step back

As exciting as this progress is, investors may be getting ahead of themselves. As I’ve already said, this business doesn’t have a revenue stream. And with limited cash reserves, it needs to find external capital.

But is that fine because of the signed funding agreement? Well, no. The deal is still in its infancy and is entirely subject to further negotiation, as well as plenty of due diligence. Nothing may come of it. And in that case, the penny stock will have to find another investor.

But even if funding is secured, there still remains years of testing and site development ahead before any commercial production can begin. That’s plenty of time for something to go wrong. And it’s one of the highest risk factors early-stage mining companies suffer from.

In other words, the recent boost in the penny stock is entirely driven by expectations rather than fundamentals. In my experience, that’s a dangerous path to take as an investor. After all, if the slightest sign of trouble emerges that could compromise aggressive investor forecasts, I wouldn’t be surprised to watch the penny stock collapse.

Needless to say, I’m not keen on adding this business to my portfolio today. But given time, the uncertainty about its future could dissipate and reveal a thriving investment opportunity. That’s why I’m keeping it on my watchlist.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.