Investing in penny stocks can be a lucrative pastime. Unfortunately, as well as making substantial profits, investors can also incur significant losses with these investments. As such, they may not be suitable for all investors.
However, I am comfortable buying and holding smaller businesses, and with that in mind, here are three penny stocks I would buy as recovery plays for my portfolio today.
Penny stocks to buy for growth
At the top of the pile is The Fulham Shore (LSE: FUL). Despite the disruption of the pandemic, this restaurant operator has been able to navigate the challenging environment quite successfully. Revenues decreased 41% for the year ended 28 March 2021, and the group reported an operating loss of £4.8m for the year.
However, now all of its restaurants are back open again, management is plotting an expansion. It has identified 10 new locations, which it plans to open in the next financial year, with a further 150 additional sites on the cards.
With management planning this sort of growth, I think the stock could be an excellent growth investment to add to my portfolio.
Despite the opportunity here, I will be paying close attention to the company’s growth plans. Many restaurant owners have collapsed in the past due to over-expansion. The Fulham Shore is not going to be immune to this risk.
As well as The Fulham Shore, I would also buy Revolution Bars (LSE: RBG) for my portfolio of penny stocks. With a market capitalisation of just £52m, this business is smaller than most and possibly riskier. Nevertheless, I believe it has substantial recovery potential.
According to management’s latest trading update, the company is now trading ahead of expectations after the reopening. Trading between 17 May and 1 July was 86% of 2019 levels, which tells me the firm is heading in the right direction.
It also implies consumers have been eager to return to its offering, which will be necessary for the recovery.
Having said all of the above, Revolution Bars has been struggling with sluggish growth for some time. Before the pandemic, it had just undergone a significant restructuring. There is no guarantee it will be able to avoid ending up in the same position in the years ahead, especially after the events of the past 18 months.
DX (LSE: DX) provides a wide range of delivery services across the UK. Its services have been in demand over the past year.
Management expects the company to book a significant increase in profit before tax this year, as well as a considerable increase (37%) in the level of cash on its balance sheet. According to projections, it will end the financial year to 3 July with net cash of £16.8m.
According to the company, the high demand for freight services means the group’s freight business will deliver substantial growth. It does not look as if the need for these services will let up anytime soon as the UK deals with its lorry driver shortage.
With these tailwinds behind the enterprise, I would buy it for my portfolio of penny stocks. However, I will be keeping a close eye on DX’s growth. The delivery market is highly competitive, and if the firm fails to keep up with the competition, its growth could come grinding to a halt.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK 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.