I like to own a selection of penny stocks in my portfolio. I want to have exposure to these smaller companies because they can offer more growth potential than their larger peers.
However, this potential for reward also comes with added risk. As such, these equities may not be suitable for all investors.
Still, I’m comfortable with the level of risk involved with buying penny stocks. Here are three such investments I’d buy for my portfolio today.
Recovery penny stocks
The first two equities on my list are recovery plays. The first is new and used car dealer Pendragon (LSE: PDG). Although it saw sales plunge last year, they’ve bounced back in the first half of 2021. As the demand for new vehicles is constrained, second-hand car prices have jumped.
Thanks to this environment, the company reported a record underlying profit before tax of £35.1m in the first half of this financial year. Sales increased 63% on a like-for-like basis.
Nevertheless, despite this growth, shares in Pendragon are trading around 30% below their 2019 high. I think this could present an opportunity.
The other company I’d buy for my portfolio of penny stocks as a recovery investment is Stagecoach (LSE: SGC). This public transport company has effectively been living off state handouts for the past 18 months.
Without financial support such as the £227m funding pot for bus services announced by the Department of Transport at the beginning of July, the enterprise might well have collapsed last year.
It’ll take some time for its recovery to gain traction, but I believe demand for public transport will only increase in the long term. Challenges such as climate change and the increasing cost of owning a private vehicle may drive consumers onto public transport, benefiting companies like Stagecoach.
The main risk both Pendragon and Stagecoach face is the threat of further disruption caused by coronavirus. If this happens, both of these companies may have to revisit their growth projections. As such, I’m not going to take their growth for granted.
Still, I’d buy both for my portfolio of penny stocks today.
The final company I’d buy is Hornby (LSE: HRN). The international models and collectables group has had a rough few years. As the company struggled to rekindle growth, the pandemic arrived, decimating sales.
Annual revenues have declined from more than £50m years ago to around £37m in its latest financial year. At the same time, profits have plunged.
However, according to its latest trading update, the group’s starting to experience a recovery. Sales are returning to pre-Covid levels, and its order book is “substantially higher than a year ago.” It’s also bolstered its supply chain by acquiring LCD Enterprises Limited, which supplies diecast model vehicles and railway products.
Although I’d buy Hornby as a turnaround opportunity for my portfolio of penny stocks, I should point out that the company’s turnaround isn’t guaranteed. It could struggle in the increasingly competitive retail environment, and sales and profits may continue to slide.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.