1 of the best ex-penny stocks to buy for the new bull market?

Penny stocks are notorious for being high risk. And for good reason. Too often, these stocks explode in investor excitement only to collapse in disappointing results.

But every once in a while, a hidden gem emerges and grows enough to leave penny stock territory and become a small cap.

Investing in the latter is still risky. But the business is more established and proven, making investments less speculative.

And one of the companies that caught my eye this week is Science Group (LSE: SAG). Its share price has risen nearly 60% in the past two years and could be primed for stellar growth as a new bull market emerges.

Top ex-penny stocks?

Science Group is an international science-led service and product development company. It works with businesses to consult on R&D projects, help with regulatory compliance, and is a supplier of DAB/DAB+ radio chips.

It’s quite a diverse company for a company with a market capitalization of just £177m. However, these services have proven invaluable to many industry leaders. For example, Science Group helps AstraZeneca developed an automatic drug identification system. And it helps too Vodafone to build the M-Pesa mobile payment solution used by more than 51 million people today.

In addition, management’s latest decision to acquire TP Group could further expand its reach, throwing defense into the list of sectors it serves. Given his impressive track record, this move seems wise. After all, it opens the door to government and military contracts that can be a reliable long-term source of income.

Over the last five years, Science Group has quietly delivered double-digit revenue and profit growth, with profits slowly expanding. And this may be set to accelerate as we enter a new bull market. After all, if economic conditions improve, R&D spending may increase, increasing demand for second-hand stock services.

Investigating caveats

As promising as Science Group seems, there are always risks to consider. In the long term, management must ensure operations stay ahead of the regulatory curve. If outdated compliance advice is given to customers, it can have severe legal and reputational consequences.

But there are more pressing concerns in the short term. TP Group is a business that is suffering from heavy legacy maritime contracts. The contracts were renegotiated but, in the meantime, had wiped out the company’s profits.

Science Group’s decision to acquire it seems to be a turnaround play. And if successful, it can prove to be a great source of long-term value. But the process may take some time. And a poorly executed strategy can undermine the success of ex-penny stocks so far.

Having said that, the leadership team has proven to be smart, so far. That’s why I’m cautiously optimistic about the deal. And in the long run, I believe patient investors can be richly rewarded.