A surging ex-penny stock to buy for the defence spending revolution?

Investing in penny stocks is a risky strategy. But when investors spot a hidden gem, some explosive gains can be unlocked. And anyone who snapped up shares in the now ex-penny share Concurrent Technologies (LSE:CNC) at the start of 2024 has enjoyed this thrill first hand.

The sleepy computer boards business turned high-performance defence hardware specialist has surged from 81p to over 270p today – a 233% increase in just over two years, vastly outpacing larger defence companies such as BAE Systems.

But is this just speculation? Or could it be the beginning of an even larger bull run? Let’s find out.

What’s behind the 230% surge?

There are a lot of forces at play supporting Concurrent’s business. The most obvious is the rapid rise in defence spending across European nations and NATO members.

However, there’s also a more subtle tailwind boosting this business. The now-called US Department of War has enacted the Sensor Open Systems Architecture (SOSA) mandate. This requires all new military computing hardware to use an open rather than proprietary architecture that defence contractors have historically produced.

SOSA breaks the business model of locking militaries into expensive ecosystems. But since Concurrent’s built its entire product range to be SOSA compliant, the firm’s far ahead of the curve while incumbents are busy transitioning their hardware systems and nursing significant technical debt.  

The result has been a massive inflow of new defence contracts, resulting in a record order book, record sales, and record profits – all of which are continuing to grow.

With that in mind, it’s no wonder Concurrent’s stock price has more than tripled, lifting the business out of penny stock territory. And with only one professional analyst following this business, even more explosive growth could emerge as more experts begin to discover the small-cap stock.

So is this a no-brainer buy?

Where’s the risk?

Concurrent has an impressive growth trajectory ahead. But like all stocks, there are some notable risks to keep an eye on. The firm’s surging order book clearly demonstrates that Concurrent is making the right moves to attract new and retain existing defence customers. But it’s also a double-edged sword.

Scaling up manufacturing capacity is no easy task. And while the company’s trying to stay ahead of this, the business has already encountered delays in the UK due to issues with planning permission.

So far, this seemingly hasn’t impacted order fulfilment. And management’s devised a workaround that’s expected to complete its capacity expansion efforts by mid-2026.

Yet any further holdups could result in customer orders being set back. This would hurt newly formed customer relationships and undermine the group’s SOSA-driven first mover advantage versus larger defence contractors.

The bottom line

Concurrent has a rare opportunity right now to secure new long-term relationships with the US and European militaries. But proving itself to be a reliable partner is critical to long-term success. Otherwise, customers could just switch back to industry incumbents once they catch up to SOSA.

Put simply, there’s still a lot of execution risk surrounding this business. But with management proving to be quite capable and finding a relatively rapid solution to its planning permission problems, it’s a risk I’m tempted to take. And it’s not the only ex-penny stock on my radar this month…

The post A surging ex-penny stock to buy for the defence spending revolution? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Concurrent Technologies Plc. 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.

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