I think buying a basket of penny shares, primarily companies with a UK focus, could be an excellent strategy to profit from the country’s economic recovery over the next few years.
This is a strategy I plan to follow, but it might not be suitable for all investors. Penny shares can be incredibly volatile, and these smaller businesses lack the checks and balances in place at larger companies. Therefore, the risks of investing are significantly higher.
Still, I am comfortable with the risks involved. That is why I have been considering buying the small-cap stocks highlighted below for my portfolio in August.
Penny shares on offer
The first company is pub operator Marston’s (LSE: MARS). This enterprise has been on my radar for some time because I think the business is a well-managed operation that has always appeared to be undervalued by the market.
And I think now could be the perfect time to buy the stock as it benefits from the reopening. According to City analysts’ projections, which are based on the company’s own forecasts, losses are projected to decline from £360m in 2020 to £65m this year. Marston’s could be profitable in 2022, analysts suggest, with income of £57m pencilled in for the year.
Based on these projections, analysts believe the stock is trading at a forward P/E of 10.2. I think this looks attractive considering the company’s growth potential.
That said, the business does carry a lot of debt, which could hold back its recovery if interest rates rise substantially in the years ahead.
I would also buy Revolution Bars Group (LSE: RBG) for my portfolio of penny shares for the same reasons. As the economy reopens, I think the bar operator will see a substantial recovery in sales and earnings.
The company is projecting an earnings before interest, tax, depreciation and amortisation loss before lease adjustments of £12.5m this year. If the reopening continues as planned, analysts think the group will break even in 2022 and return to growth in 2023.
Revolution has also taken advantage of the current market environment to raise money from investors. This has enabled it to substantially reduce borrowings to just £5m. A stronger balance sheet should help support the group’s recovery.
But while I am optimistic about the company’s prospects, I am wary that it was struggling to earn a profit even before the pandemic. This implies Revolution may struggle to return to profit even after the crisis has receded.
I would also buy City Pub (LSE: CPC) for my portfolio of penny shares. While not technically a penny stock, its market capitalisation of just £123m gives it similar qualities.
This premium pubs operator, which owns locations across the country, primarily in cities, is forecast to lose money for the next two years.
However, with the group’s latest trading update reporting that sales since reopening are running at 90% of 2019 levels, I think there is a chance the stock could outperform expectations.
One challenge this company could face is the home working revolution. If workers are allowed to work from home forever, city centre activity may never return to pre-crisis levels. This would hurt City Pub’s growth prospects.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Marstons. 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.