'True' penny stocks, those stock market tiddlers valued at 10p or less, are unlikely to ever lose their lustre among small cap investors. The reason is quite simple – the percentage gains on offer if the shares move just a few pence in the right direction are truly spectacular.

However, these stocks don't come without considerable risks. Penny punts are not only usually very young businesses with fledgling products or services, but they often operate under strict financial constraints.

Cash calls on investors are routine, restructurings likely and success is the exception, not the rule. And this is before you get to the liquidity and share price spread issues. But bagging just one successful penny stock in a year is likely to transform your overall portfolio returns.

Award International

Seymour Pierce brought Award International to market through a £2.25 million placing at 10p in March. This profitable promotional incentives firm has two fast growing subsidiaries and boasts blue chip clients like Pepsi that belie its penny share status.

Maiden interim figures to March – versus a full year to September – revealed encouraging profits of £110,000 (£185,000) on £2.24 million (£3.5 million) sales, and earnings of 0.92p a share. At the current 9.5p share price, Award has a market value of just £3.1 million and an historic p/e of just over ten.

This is far too low for a business that is well balanced and seems on the verge of making significant breakthroughs.

For instance, promotional merchandise accounted for 90 per cent of first half turnover, with conferencing and events making up the balance. But analysts say that further integration of the events and travel departments and a focus on travel promotions and incentives should boost future profits. Award's shares could reward patient investors.

Market: AIM Share price: 9.5p

Market cap: £3.1m

Screen FX

Sharing the same broker as Award is Screen FX, currently priced at 9.8p. This intriguing venture offers digital screen advertising in shopping centres and raised £5 million earlier this year at 10p a share. Bringing 'outdoor advertising to life', it has a deal with Capital Shopping Centres to install its flat-screen advertising displays.

Through these displays, Screen FX can deliver major brand advertising sites to its clients, who are capitalising on the rapid growth in outdoor advertising spend by major global compaies such as Mars and Disney.

Intriguingly, the management team, led by chief executive David Clark, believes it can make around £2 million each year in the two years to December 2005. If these returns are delivered, a bonus issue of shares will be triggered, and the market value of £11.7 million will look seriously undercooked. Well worth a look ahead of maiden interim numbers in September.

Market: AIM Share price: 9.8p

Market cap: £11.7m

Matrix Communications

Of all the restructured ventures on the market (and there are many) Matrix Communications – formerly Offshore Telecom – looks one of the most appealing. This group is a fast-growing, profitable and high-margin systems integrator.

Steered by chief executive Ian Smith, the revamped firm ditched its loss-making satellite communications activities for £30,000 and then successfully acquired and integrated three profitable IT companies. It is now a specialist in building networks with hardware from Foundry, a rival of Cisco.

Its recent interim numbers were very impressive. These showed profits rocketing to £550,000 as turnover surged more than £3.4 million to £3.7 million. Cash resources were a tidy £1.9 million and contract wins with Vodafone and The London Internet Exchange won it many friends in the City.

Smith's challenge now is to drive cost efficiencies and cross-sell products and services across the client base. Recent forecasts from broker and adviser Daniel Stewart suggested pre-goodwill profits of £1.9 million this year to October, on £10.5 million sales, giving earnings of 0.13p. By 2005, investors could expect £20.4 million sales, a £3.3 million profit, and earnings of 0.18p. If these figures are achieved, the stock will be well worth its forward multiple of 23 times, dropping to 16.7 for 2005.

Happily, all the signs are positive. Just recently, Smith signed Heads of Terms to buy a profitable 'mid-tier' IT distribution business on 1 August with annual sales of £5.5 million. A contract in the education sector was also secured.

Market: AIM Share price: 3p

Market cap: £34.3m

Avionic Services

Staying with the turnaround theme, air traffic control systems innovator Avionic Services is worth more than a cursory look. Bossed by company doctor Bill Price, it recently clinched a contract worth £770,000 at the Kingdom of Bahrain's Sakhir Airbase for the supply and installation of air traffic control and landing facilities. This deal, and an earlier contract for work at Las Americas Airport in the Dominican Republic, are worth almost £2 million, double the sales achieved last year. Moreover, the total value of deals secured in the past 12 months is between £6.2 million and £6.3 million.

As for the future, Price has received written confirmation from the Civil Aviation Authority (CAA) that approval for the group's flight inspection service is 'forthcoming', allowing Avionic to start conducting yearly airborne flight inspections on UK airports with instrument landing systems and navigational aids.

Analysts are predicting losses of £650,000 for the year to June, on £3.98 million sales. But that is a dramatic reduction from last year's £3 million deficit and suggests better times ahead. The last estimates suggested break-even on £4.98 million sales for June 2005. This could be surpassed.

Market: AIM Share price: 3p

Market cap: £2.7m

Eckoh Technologies

Speech recognition specialist Eckoh Technologies is making all the right noises. It toasted the release of strong results for the year to 31 March in style by announcing a brace of contracts. The actual figures showed revenues up by £7.5 million to £62.5 million and losses scythed back from £9.1 million to £1.1 million. However the stats masked a series of exceptional gains and losses, relating in particular to the acquisition of rival Intelliplus and the closure of a loss-making mobile wholesale business.

The contract wins were with Vue (formerly Warner Village cinemas) and the London Stock Exchange. These deals were welcome additions to the £6 million of business won back in December from TD Waterhouse and others. A significant deal with a travel company is also thought to be under negotiation.

With the orders continuing to flow, £10.2 million in the bank and house broker Evolution Beeson Gregory forecasting a £1.9 million pre-tax profit from £81.3 million of sales this year to March, the shares are worth a punt on recent weakness.

Market: AIM Share price: 10p

Market cap £27.5m

FIVE TO MISS

Intelek

We've been supporters of communications and aerospace component manufacturer Intelek in the past, but its fair to say our patience has finally run out. The last results showed a 6.5 per cent drop in full year revenue to £38.9 million, with sales restricted by poor US currency conversion rates and a strategic decision to turn away low-margin business. That said, pre-tax profits actually rose 44.7 per cent to £722,000 as the company's chip and circuit board business focused on the higher end of the market. But its largest business, Paradise Datacom, the producer of modems and transceivers, has been severely affected by US exchange rates as has specialist power supply developer Pascall Electronics. House broker Williams de Broe forecasts only slight improvement next year. Avoid/sell

Market: techMARK Share price: 9.8p

Market cap: £8.4m

Envesta Telecom

Self-styled alternative telecoms operator Envesta Telecom's share price of 2p is reflective of its current trading position. Its principal subsidiary Seven Telecom suffered an 'onslaught of ferocious price competition', significantly reducing margins that even took its house broker Seynmour Pierce by surprise. At the interim, last year's pre-tax profit of £69,395 was converted into a loss of £299,110. No significant improvement is expected in the second half. Avoid.

Market: AIM Share price: 2.0p

Market cap: £4.2m

Sira Business Services

Contract cleaner Sira suffers from a lack of interest in its shares and a bearish trading outlook. Interim figures to December revealed profits up 23 per cent to £258,000 on a tiny two per cent rise in sales to £7.75 million. However, the gross margin waned from 25.7 per cent to 25.1 per cent on rising costs such as the minimum wage and national insurance contributions that remain 'unrelenting'. With the business facing high levels of competition and work being secured on tight margins, Sira is best ignored.

Market: AIM Share price: 6.5p

Market cap: £2.5m

Eagle Eye Telematics

Last year to November saw telematics technology supplier Eagle Eye significantly overhaul its business, but it still continues to disappoint. Full year losses widened after an exceptional stock write off (and goodwill charges), while the dividend was skipped. Of course, the company has a leaner overhead base and a more focused sales strategy, and remains convinced that the long-mooted 'explosion' in the telematics take-up is imminent. We've heard all of this before, many times, from many telematics players. Issued at 25p, the shares have few attractions even at the current 4.5p.

Market: AIM Share price: 4.5p

Market cap: £1.2m

Matisse Holdings

Investors should proceed with caution at Matisse, a shell backed by the controversial Peter Abbey's Chiddingfold Investments, as well as Aussie Bruce Rowan's Web Shareshop. The company is chasing a reverse deal in no particular sector. Shares in the group once topped 50p (when it was known as Prestige Publishing), but Matisse shares change hands for just 2.38p, with a spread of 2p-2.75p. Potential deals could come its way. But don't buy in to find out.

Market: AIM Share price: 2.38p

Market cap: £1.3m