Investing in penny stocks can be a lucrative pastime. Unfortunately, investing in these small businesses can also be incredibly risky. So, it’s not suitable for all investors.
However, I’ve always owned a portfolio of small-cap stocks because I like to follow small businesses. What’s more, I think they can be easier to understand than larger enterprises.
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Small-caps and penny stocks also provide more exposure to the UK economy, making them attractive investments as it starts to open up.
There’s one company, in particular, I’d buy for this reason. I think the business below has the skills and financial flexibility required to capitalise on that UK economic recovery.
A champion of penny stocks
Any company with a market capitalisation of around £100m or less technically qualifies as a penny stock, even if its share price is above 100p.
Property specialist Belvoir Group (LSE: BLV) has a market-cap of around £92m, at the time of writing. It’s a small-cap company that has big ambitions.
Belvoir operates a nationwide property franchise group with 439 offices across six brands specialising in residential lettings, property management, residential sales and property-related financial services.
The company has benefited from the boom that’s gripped the UK property market over the past 12 months. Group revenue increased 13% in the year ended December 2020. Profit before tax jumped 20%, the 24th year in a row the organisation has reported growing profits.
What I’m excited about is Belvoir’s is growth potential. The company is generating a tremendous amount of cash, which is reinvesting back into the business. At the end of December, the group’s cash balance stood at £5.9m. Such a strong balance sheet is relatively rare in the realm of penny stocks.
Acquisitions drive growth
Acquisitions form a crucial part of management growth strategy. Earlier this year, it acquired Nicholas Humphreys, a network of 18 franchise and three corporate-owned estate and lettings agencies, for £4m in cash. A few months later, it paid £600,000 to buy Nottingham Mortgage Services Limited, a wholly-owned subsidiary of the Nottingham Building Society.
As the economy reopens, I think the property market will return to normal, which may mean reduced transaction volumes. But letting volumes should increase. The group generates around 60% of gross profit from letting revenues. So, coupled with the new acquisitions, I think Belvoir is on track to report a strong performance in 2021.
That said, there are plenty of risks to the company’s approach. Acquisitions don’t always work out. This could leave the business with a costly mistake. At the same time, there’s no guarantee the property market will remain buoyant. A sudden increase in interest rates could send transaction volumes plunging. That would severely impact Belvoir’s growth.
Despite these risks, I’d buy the company for my portfolio of penny stocks today, considering its growth potential.