Many UK share investors don’t like to buy cheap shares like penny stocks. This is because their rock-bottom prices and their low volumes can result in serious share price volatility. As a long-term investor, though, the threat of temporary price choppiness doesn’t put me off. With the right research I’m confident I’ll find stocks to buy that have a chance of rising strongly in value over the long haul.
Here are two such penny stocks I’m thinking of adding to my shares portfolio.
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I think BATM Advanced Communications (LSE: BVC) — which trades around 92p — could be one of the best stocks to buy in the post-coronavirus environment. Thanks to its role as a supplier of medical diagnostic and testing equipment, revenues at its Bio-Medical Division doubled in 2020. I expect sales of its product to remain strong amid what could be a long road out of the pandemic. A recent British Medical Journal paper, for example, suggested that the coronavirus “will not be eradicated but will become endemic.”
BATM generates 70% of its income from the manufacture of medical products. The remainder is sourced from another industry I expect to take off over the next decade: that of networking and cyber security technology. I’m tipping demand here to take off as the world becomes more digitalised, and particularly as e-commerce grows and flexible working methods become more popular.
A word of warning, though. City brokers think BATM’s earnings will soar 25% year-on-year in 2021. As a result this penny stock trades on an elevated forward price-to-earnings (P/E) ratio of around 50 times. This wouldn’t discourage me from investing, however. I think this valuation reflects the excellent opportunities the company has across both divisions. But such a high multiple could prompt a sharp share price reversal if the business encounters trouble.
A cheap UK penny stock on my radar
Another sub-£1 share I’m thinking of buying is Speedy Hire (LSE: SDY). I don’t think its current price of 72p reflects the stock’s exciting profits outlook. Today the tool, plant and equipment rental company commands a forward price-to-earnings growth (PEG) ratio of just 0.4.
A reading below 1 suggests that a stock could be undervalued by the market. City analysts think annual earnings here will rise 37% this fiscal year (to March 2022) as the construction industry bounces back. I wouldn’t just buy Speedy Hire because I think the sector should experience strong and sustained growth beyond the near term, though. I’m encouraged by the rate at which rental giant’s winning share from its rivals. It recently signed major contracts with the likes of Network Plus, MWH and Horbury.
I’m mindful of the fact that the stock is a highly-cyclical one. As a consequence its recovery could be derailed by the twin impacts of Covid-19 and Brexit on the domestic economy. Still, at current prices I think it could be considered too cheap for me to miss.