Penny stocks might not be suitable for all investors because they tend to be smaller businesses.
However, there’s no set definition of a penny stock. So, companies with market capitalisations of several hundred million pounds or even billions of pounds can qualify.
As such, when buying penny shares for my portfolio, I tend to concentrate on larger businesses. Here are two companies I would buy for my portfolio right now.
Penny stocks I would buy
Both companies I have my eye on are related to the UK housing sector. The housing market in the UK is booming at present, and it doesn’t look as if it’s going to slow down materially any time soon.
While a sudden increase in interest rates or an economic slump may send house prices lower, there’s still going to be a considerable amount of pent-up demand from first-time buyers and upsizers. The government is doing everything possible to help people onto the housing ladder. I think that should help support prices, especially at the low end of the market.
With that in mind, I would buy penny stocks Topps Tiles (LSE: TPT) and Foxtons (LSE: FOXT). These companies operate in different sections of the housing market. I think that could help provide a level of diversification for my portfolio.
Foxtons is best known for its estate agency business. However, it also has a rental and mortgage broking operation, which has helped provide a steady income throughout the pandemic. Due to the booming housing market, the London-focused company reported a 24% increase in revenue in the first quarter to £28.5m from a year earlier. It also revealed a 20% increase in mortgage-broking revenue.
I think these figures showcase Foxtons’ potential. The company’s incredible growth potential is one of the main reasons why I’d add the firm to my portfolio of penny stocks.
Foxtons earns revenue when homeowners buy and sell properties. Meanwhile, Topps’ main markets are home construction and renovation.
As activity in the housing market has accelerated over the past six months, Topps has benefited. Despite being impacted by Covid restrictions, sales in the 26 weeks to the end of March fell just 2.4% from £106.2m to £103.6m.
Management expects a significant increase in sales when coronavirus restrictions are lifted.
Only time will tell if management is correct, but based on what happened last year, I think Topps will see an increase in sales when restrictions are weakened.
Despite their opportunities, these companies face risks as well. As I outlined above, an increase in interest rates could hit property prices. This would reduce the volume of property transactions. Both Foxtons and Topps could suffer revenue declines if the number of homes sold drops and the volume of renovation work falls. Another wave of coronavirus could have a similar impact on the property industry.
Despite these risks and challenges, I would buy both penny stocks for my portfolio today as a way to invest in the UK housing boom.
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Rupert Hargreaves 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.