January 2012's Penny Shares To Watch

• How you should invest in 2012…

• Watch ACCSYS TECHNOLOGIES (AXS) in 2012…

How you should invest in 2012

(This article first appeared in Penny Sleuth in January 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Limited)

Welcome to 2012 – it’s a new year, and it’s a new world of investment.

The last three wrenching years transformed the challenge of investment. And today’s test is one that I am relishing. For years investors have been happy to rely upon rising property prices and fund managers’ promises. But now property prices are falling and miserable fund returns have destroyed faith in the professionals.

To make money, you’ll need to back successful businesses. It is that simple. The source of wealth creation is successful business. And the closer you can get to the source the more money you will make.

I expect plentiful opportunity. For the UK this is a new age of entrepreneurialism. Last year a record 480,000 new businesses were created and while many will fail, some will flourish and will lead the revival of the economy.

I want to invest in businesses led by ambitious, smart entrepreneurs. And I’ve certainly met a few of those over the last couple of years. But a great leader is not enough. I think there are four other vital criteria for a great penny share. And they’ll help us find some truly outstanding opportunities in 2012 (I’ll spell out my top five stocks for this year at the end)…

My four penny share signals for serious returns

1. A Great Product

I look for a great product. It does not have to be a thing that I can touch or hold in my hands. There is nothing wrong with providing a great service like running a restaurant, or relying on your brain power. Some of Britain’s most successful businesses – IMAGINATION TECHNOLOGIES (IMG) and ARM HOLDINGS (ARM) for example – don’t make anything but simply license out their smart technology designs to other manufacturers.

But whatever the business sells, I am looking for something fresh, something that is not already being done well by others, and something for which customers will be prepared to pay good money.

2. An Easy Sell

The best products do one of two things. They either meet a need or create a desire. We found that our cupboards and sheds were overflowing, so LOK’N STORE (AIM: LOK) provided more storage space. But APPLE (NASDAQ:AAPL) created the desire to listen to digital music on the go. The important point is that if customers need or want a product, they do not take too much persuasion to buy it. You don’t have to talk them into it and that means your marketing budget can be minimal.

3. No Competition

Very few companies can claim to have no competition and if nobody is even trying to do what they do, you might wonder whether it even needs to be done. It is also true, up to a point, that the presence of competitors can stimulate the market. After all, if Apple is out there creating the market for iPods and iPads, it is easy for copy-cats to sneak in behind and grab some of the market. Competition leads to lower prices and lower prices lead to lower profits.

But at least in the early years of a business, a unique product can enable it to make fat profits – and fat profits are what drive share prices. I rate the widescreen retinal imaging devices of OPTOS (LSE: OPTS) as a great product with no genuine competition.

4. A Big Market

You can have the best product in the world, but you need to sell it. If you buy a pub in rural England and turn it into a super restaurant, you will have a nice business but your turnover and profit will never rise above a modest level. But ASOS (ASC), for example, can sell its clothing worldwide. Online commerce has transformed the sales opportunity for small businesses – if their product is good enough to grab it. A potential big business needs a potential big market.

If you can find a business that matches these four criteria that’s run by the right people, back it and you should make money – whatever the economic circumstances.

How you should invest in 2012

So here is my advice for 2012. Concentrate on investing in great businesses and forget the rest. Will the euro implode this year? Don’t ask me! Will we have inflation or deflation? Haven’t a clue! If you wait until the economic outlook looks settled and rosy you will probably wait forever. In the meantime, whatever the economic circumstances, there will always be successful small businesses. Join me this year as I hunt for these real wealth creators.

These stocks certainly meet the criteria I’ve talked about today. I’m still looking for a 325% gain on the tiny drug stock turning silkworms into cash. And I’m targeting a 478% gain on the driller.

Watch this intriguing penny share in 2012

(This article first appeared in Penny Sleuth in December 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Limited)

Beating a path to my door this week was a man who is ‘overwhelmingly excited’ about 2012.

Paul Clegg drove all the way from Winchester to my house near Oxford and then spent two hours bringing me right up to date with what I think is one of the stock market’s most intriguing penny shares, ACCSYS TECHNOLOGIES (AXS).

Thanks to its stock market listing in the Netherlands, as well as on AIM, this is a share that is eligible to hold in an ISA. But that’s not the only attraction of a story that for me has one great merit – its product.

Accsys has found a way of turning cheap, fast growing softwood into the sort of durable hard wood sought after by architects, builders and joiners alike. The application of acetic anhydride alters the properties of the wood without altering its chemical content. The end result is a product called ACCOYA that is hard wearing and easy to work with.

These are clearly desirable attributes of a product that also adds value, saves rain forests and has a global market. And yet Accsys’s shares have been a perennial disappointment.

In fact, I became frustrated with Accsys and sold it for a loss in Red Hot Penny Shares earlier in the year. I said at the time that there was “little sign that Accsys is operating at anywhere close to the required scale”. But from my chat with Paul Clegg, that could change in 2012, as I’ll show you in a moment…

Turning a good idea into a good business

The road from a good business idea to a successful commercial venture is full of pitfalls. Accsys has stumbled into several. Its biggest headache has been a venture with Diamond Wood, a company set up to distribute ACCOYA wood produced at Accsys’s factory in the Netherlands into Asia and ultimately build its own plant in Nanjing.

Clegg joined as chief executive in 2009. By then, Accsys had invested €10m in Diamond Wood and was confidently expecting (and in some cases taking financial credit) for future licensing and royalty income. So it was highly reliant upon this relationship.

Two years on and Diamond Wood is yet to build that Chinese factory. Its latest plan is to raise funds on the junior market of the Malaysian Stock Exchange. If all goes well, Diamond Wood could be funded to construct its factory at the end of the first quarter of 2012 – when it is also on the hook to pay its annual license fee to Accsys.

Accsys needs partners to grow

Whatever happens here – and any further prevarications on the part of Diamond Wood may finally snap this strained relationship – Clegg was at pains to point out Accsys today is about much more than this. He has high hopes for two other initiatives.

The first could soon see him sign a deal with a major, but as yet unidentified, multinational company to manufacture ACCOYA under license for several European countries. This deal has been awaiting evidence that acetylation can work equally well on the northern hemisphere’s Scots pine as it does on the southern hemisphere’s faster growing Radiata Pine, Accsys’s traditional softwood. I understand that this has indeed been demonstrated and an outline deal could be signed soon.

The other great hope is for MDF, a favoured building material and one that can be made from any type of wood. So far MDF has been excluded from outdoor use because it absorbs moisture. This is a competitive, low-margin industry and producers around the world are under pressure to raise their game. One solution is to acetylate the MDF, making it suitable for outdoor use. Accsys has been supplying acetylated wood to an Irish manufacturer, Medite, which has launched weatherproof MDF (called TRICOYA) onto the market.

So that’s three things in Accsys’s favour here:

1. It has reduced its reliance on Diamond Wood.

2. TRICOYA is now on the market.

3. The superiority of ACCOYA over other building materials is widely accepted.

So how is the business doing?

This is one to watch in 2012

After a period of de-stocking in the autumn, sales to Germany are recovering strongly; a US customer who baulked at a price increase earlier in the year is now ordering again; and Accsys has commenced discussions with other potential licensees.

The future looks rosy and yet Accsys is valued at no more than the sum of its cash, net receivables and stocks of wood.

Challenges remain. Accsys needs to strike deals that are as watertight as its ACCOYA wood; it needs to make the transition from being a manufacturer to a licensee; it needs to match production capacity against growing demand; and it would like to achieve this without having to raise any more money – something that Clegg believes can be done.

That said, the prize is great. The market for TRICOYA alone could eventually be worth over £2bn per year. Of that, Accsys could pocket 2% in royalty income.

No wonder Paul Clegg is looking forward eagerly to 2012. I’ll be watching the company closely to see how it progresses.

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Good investing,

Tom Bulford Editor, Red Hot Penny Shares

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(These article first appeared in Penny Sleuth in December 2011 & January 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Limited)