Penny stocks are potentially highly lucrative. They’re shares of typically small companies. With careful research, and a diversified selection, I’d consider buying a small number of penny stocks for the more speculative part of my Stocks and Shares ISA.
Top penny stocks
When looking for the best shares to buy, I like to see high return on capital. This is a key measure of a quality company. But don’t take my word for it. Both Warren Buffett of Berkshire Hathaway and Terry Smith of Fundsmith Equity make this same point.
I also like to see high profit margins, and plenty of cash flow. Right now, there are several penny stocks that meet my criteria.
Ready to fly
One of the stocks that I’d consider now is aviation services company Air Partner (LSE: AIR). It’s a small company with a market capitalisation of just £57m, but I reckon its shares are primed to fly.
Air Partner provides private jets and aviation safety and security solutions. Despite travel restrictions, it traded strongly in the first half of the year. In fact, the UK private jets division saw a rise in new customers in addition to more bookings from existing clients. In the US, demand from wealthy individuals helped boost bookings to levels seen before the pandemic.
Activity in Europe has been muted but I reckon that as travel restrictions begin to ease, business should pick up soon.
Bear in mind, however. Pandemic restrictions and cross-border limitations continue to be a concern. Also, in the long term there are business risks regarding its impact on the environment.
That said, I think the share are currently cheap. In addition to positive trading, I also like Air Partner’s financial metrics. It looks like a good quality and well managed operation. It offers a leading return on capital of over 35%, double-digit profit margins and a conservative balance sheet.
Read all about it
My next penny stock that I’d consider buying right now is in a very different industry to aviation. It’s the business of newspapers. Smiths News (LSE:SNWS) is the largest distributor of Newspapers and magazines in the UK. Although physical newspapers are a declining industry, Smiths has recently piqued my interest.
In its most recent trading update, it reported a strong financial performance with trading set to be ahead of market expectations. Its core sales of newspapers and magazines stabilised as social movement picked up. And the return of major sporting events helped sales of its stickers and albums.
There are some negative points to bear in mind, however. This is a declining sector. It may not be a ‘hold forever’ stock for me. In the long run, I think sales of physical newspapers and magazines will decline. This could lead to poor share price performance for me.
That said, the company currently offers strong returns and cash flow generation. With a price-to-earnings ratio of just 4x, I reckon the shares are too cheap.
With the recent dip in share prices, it has made both penny stocks even more attractive. I’d look to buy both for my portfolio.