Over the years, I’ve found penny shares — those with a share price under 100p — to be a rewarding hunting ground for potential investments. But I’ve also suffered some costly losses among penny stocks, which are often speculative or out of favour due to problems.
Today, I want to look a two such companies that have caught my eye recently. They may look cheap, but can either of them double my money this year?
This penny share could be a cheap bet on gold
Small-cap gold miner Shanta Gold (LSE: SHG) has been trading on London’s AIM growth market for as long as I can remember. The firm’s main asset is the New Luika gold mine in Tanzania, but it’s also working on a number of other African projects.
The rising gold price last year meant 2020 was a good year for gold miners. Shanta was no exception. Sales rose by 31% to $147m and operating profit surged 750% to $44m.
However, I’m not sure this momentum will continue. The company’s guidance for 2021 is for a slight drop in production and higher mining costs. I’m also concerned by Shanta’s long history of shareholder dilution — the group’s share count has risen from 272m to more than 1,000m over the last 10 years.
Although this penny stock may look cheap on six times forecast earnings, I don’t think it’s the kind of hidden bargain I’m looking for.
A recovery situation
When equipment hire firm HSS Hire Group (LSE: HSS) floated on the London market in 2015, its shares traded around 150p. As I write, this penny share is changing hands for just 13p and is down by 35% over the last year.
What’s gone wrong? In my view, HSS has suffered from a combination of low growth, slim profit margins and too much debt. In some years since its flotation, HSS’s interest costs have been greater than its profits. This clearly isn’t sustainable, but HSS has struggled on.
Indeed, there have been some signs of hope recently. Revenue had returned to 90% of pre-Covid levels by the end of June 2020 and the company plans to shut 134 branches to focus on online growth. This could help profit margins, I think, as fewer employees are required.
CEO Steve Ashmore is also continuing to work on debt reduction. The firm says net debt fell by £23m to £157m during the first half of last year. More recently, HSS raised £54m by selling new shares in October.
The problem is that I just don’t think this is enough. Unless HSS can deliver a rapid improvement in profit margins, I think the business will still have too much debt. I see this as a speculative situation that could go either way. HSS shares might double, but I think they could also fall sharply.
This isn’t the kind of investment I’m comfortable with, so I will continue to stay away.
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Roland Head 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.