I like to own a selection of penny stocks in my portfolio.This is because I think there are some really attractive bargains to be had in this section of the market.
That said, while small-cap stocks can produce large profits, they can also incur significant losses. As such, this strategy may not be suitable for all investors.
Nevertheless, I’m comfortable owning penny stocks in my portfolio. With that in mind, here are two such companies I’d buy today.
The first company is Card Factory (LSE: CARD). Shares in this retailer have lost around 50% of their value since the beginning of May. That’s even though the economy has seen substantial growth during this period.
That’s why I believe there’s an opportunity here. According to Card Factory’s interim results for the six months to the end of July, sales increased 16% year-on-year, albeit from a low base.
Still, the group is incredibly cash generative. It created an operating cash flow of £36m in the first half, which allowed it to reduce borrowings by 33%.
The company’s strong balance sheet and cash generation should help it reach its ambitious target to generate annual revenues of around £600m by its 2026 financial year. By comparison, sales totalled £117m in the first half.
To hit this goal, management’s looking to invest more in the firm’s online business and retail partnerships. While there’s no guarantee Card Factory will hit this growth target, I’m encouraged by its cash generation and management’s plans for expansion.
That’s why I’d buy this beaten-down penny stock for my portfolio today. As we advance, the challenges it could face include further coronavirus restrictions and higher costs, which may dent profit margins.
Hospitality penny stocks
Another stock that appears to me to have been punished despite an improving fundamental performance is Marston’s (LSE: MARS). Since March of this year, the shares have dropped around 25%, even though the economy’s almost fully reopened.
Marston’s sales have recovered to 2019 levels, according to its latest trading update. For the quarter ended 2 October, the group reported that sales were 2% above 2019 levels across the portfolio.
I think this bodes well for the rest of the year. Even though the company still has some way to go before it returns to 2019 levels of sales and profitability, it’s heading in the right direction.
That’s why I’d buy this firm for my portfolio of penny stocks today, considering its growth and recent share price performance.
Challenges that could slow down the pub operator’s recovery include rising staffing and ingredients costs. Disruption from the HGV crisis may also prove to be a headache.
The group’s also built up quite a bit of debt throughout the past 18 months (borrowings totalled £1.2bn at the beginning of October), which could become a significant liability if interest rates rise.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Card Factory and 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.