Penny stocks are often priced low for a reason and can be seen as a risky investment. I believe some of these FTSE penny stocks could lead to generous returns and be a good addition to my portfolio.
FTSE 250 penny stock I like
Mitie (LSE:MTO) is one of the UK’s leading facilities management and professional services firms. It has a 77k-plus strong workforce and looks after approximately 2.5m assets. It is one of the UK government’s largest contractors.
As I write, shares in Mitie are trading for 62p per share on the FTSE 250 index. Reviewing its share price performance to date in 2021, this price is a 51% increase from the beginning of January, when shares were trading for 41p per share. In the past 12 months, Mitie’s share price has increased nearly 70% as this time last year it was trading for 37p per share.
The Covid-19 pandemic affected almost all stocks out there including penny stocks. Mitie was no different. Since it’s market crash low of 28p per share in October 2020, it has recovered over 120% and I expect this upward trend to continue.
Last month, Mitie released its annual financial report for the year ended 31 March 2020. I was buoyed by these results. They displayed a healthy balance sheet as well as good levels of resilience in trading despite difficult market conditions due to Covid-19.
Analysts predicted a pre-tax profit fall and were correct as it fell from £69.9m to £46m for the period announced. Analysts predicted more of a fall in profit which showed me Mitie displayed good trading resilience by beating forecasts.
In addition to this, any business on the FTSE index which is acquiring competitors grabs my attention. Penny stocks that complete acquisitions are no different. Mitie acquired Interserve in November 2020. It reported in its results that the acquisition was performing ahead of expectations.
Penny stocks have risks
Despite the fact that Mitie has positives, I do have some concerns. Firstly, it has a somewhat questionable track record and has had high levels of debt in the past. A rights issue last summer eased some of this debt and helped the acquisition of Interserve. But, it cancelled its dividend and will review this position in 2022.
Next, Mitie has been struggling for a few years and is seen as a low margin business. As a savvy investor, this does not fill me with confidence. Essentially, a small economic rumbling could cause Mitie’s share price to fall rapidly. The Covid-19 pandemic, which is still rife, could cause this economic shock.
Overall, I do like Mitie as a penny stock option for my portfolio. It has the footprint, contracts, and services to thrive in the long term in my opinion. Covid-19 has changed the way the world works. I think Mitie’s army of cleaners, security guards, and maintenance staff will continue to be in demand to service government buildings and private firms, and that will benefit Mitie’s bottom line.
I do believe as a penny stock, Mitie has room for growth and I would be willing to invest a small sum of my money and carefully observe how things pan out.
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.