Penny stocks: 1 to buy for July

Penny stocks can be cheap to buy and offer explosive growth potential. Jabran Khan details one he likes for July with 5G capabilities.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Penny stocks are often seen as risky investments and can be priced low for a reason. Despite the risk, however, I do believe some penny stocks offer enormous growth potential. IQE (LSE:IQE) is one such 5G penny stock that I am considering for my portfolio for July. 

Semiconductor shortage and share price fluctuations

IQE designs and manufactures compound semiconductor materials. These semiconductors are vital components in many burgeoning technologies right now such as hybrid vehicles as well as 5G masts.

There is a well documented shortage of these semiconductors, however. I recently wrote about this affecting hybrid vehicle manufacturer NIO and other manufacturers too. IQE is one of a number of players in the semiconductor industry scattered throughout the world. This is an issue as the pandemic means different parts of the world are experiencing economic recovery at varying rates. For example, China is recovering a lot faster than the US and UK. Production levels will vary based on location and economic recovery.

The IQE share price has dropped 35% in value so far in 2021. At the beginning of January 2021, I could pick up shares for 74p per share. As I write, shares are trading for 47p. This price drop is one thing that has attracted me to what I consider an excellent penny stock.

After a market crash low price of 22p per share, the remainder of 2020 was a good one for the IQE share price. It rose to 74p before the calendar year ended. I believe this drop off can be attributed to market-wide production issues linked to the pandemic.

Results and penny stocks risks

IQE announced full-year 2020 results in March. Revenue increased by 27% to £178m. In addition, EBITDA rose from £16.2m to £30.1m. I was encouraged by these results.

Despite IQE reporting a rise in sales and operating losses decreasing in the 2020 results, profit margins can be described as underwhelming compared to some competitors and market wide. For example, competitor Taiwan Semiconductor Manufacturing Co has underlying profit margins of close to 40%. The market average EBITDA is 25%. IQE’s sits at close to 17%.

I have three primary concerns with IQE just now. First, I find competitors in the market seem to be doing better than IQE, as I mentioned earlier. Next, the 5G rollout has slowed due to the pandemic. I expect this to continue, but it may not be a priority due to the ongoing pandemic and it seems there could be further restrictions and variants worldwide. This would affect IQE. Finally, IQE could be hindered further by production issues linked to the pandemic and recovery. This would no doubt affect its balance sheet.

My verdict

The reason I am most impressed by IQE and consider it one of the better penny stocks opportunities for my portfolio is its growth achieved to date and potential in the future. I am referring to recent growth in its top line and its product’s place in the global rollout of technology via multiple channels.

Drivers are being encouraged to drive electric vehicles and the 5G rollout is a must for the telecoms and tech industry. I believe IQE is well positioned to benefit from this demand for semiconductors despite production issues. At its current price point, I consider it one of the cheaper penny stocks I would buy for July.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jabran Khan 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.

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