Penny shares can seem tempting because they sell for less than a pound. However, price and value aren’t always the same thing. But while some penny stocks can turn out to be disappointing, I also think some are real bargains I’d happily add to my portfolio. Here is my list of five penny shares to buy now for my portfolio.
Penny shares to buy now: Lloyds
A lot of people are surprised to learn that one of the UK’s biggest banks, Lloyds (LSE: LLOY), trades as a penny share. With its £35bn market capitalisation, the company is as far from being a tiddler as one can imagine.
But investors soured on the bank during the last financial crisis and its shares have limped along in penny share territory ever since. So why would I add more Lloyds to my portfolio?
First, I think the bank’s strong brand and entrenched position in the UK banking market should give it a competitive edge for years to come. Secondly, I like the simplicity of its business model when compared to some other banks. It is focussed on retail and business banking in the UK, meaning it is less exposed to the risks of exotic banking products and missteps in distant markets. There are still risks, though. For example, an economic downturn could increase mortgage defaults, hurting Lloyds’ profits.
Photo-Me and a changing market
Think of passport photo booths and it can seem like stepping back to another era. With the growth in digital photos and current fall in international travel, passport photo booths might not seem like a growth business.
But key player Photo-Me (LSE: PHTM) runs more than just photo booths, and has been rejigging its portfolio to match changing demands. One big hit has been its laundrette machines in locations such as filling stations. Not only that: photobooths are doing well again. It was their stronger-than-expected performance recovery which led to the company upgrading full-year profit forecasts in August. Photo-Me now expects pre-tax profits of £25m-£30m before exceptional items. That’s around 6.5p-8p per share.
Currently, Photo-Me shares trade for about 65p each. I think that looks cheap given the company’s growth prospects. As well as looking for capital gains, I would also hope that the cash generative company could return to paying dividends in future. But one risk is fresh lockdown restrictions in some markets reducing shopper numbers in the areas where Photo-Me has its machines. That could reduce both revenues and profits at the company.
Penny shares to buy now: Mitie
Another name on my list of penny shares I’d consider for my portfolio is facilities manager Mitie (LSE: MTO). Over the past year, the shares have more than doubled. But they are still firmly in penny share territory. I think there could be further upside, which is why I would consider adding them to my portfolio.
As the dramatic price history suggests, Mitie comes with risks. Last year’s rights issue was dilutive. While it helped the company to strengthen its balance sheet, it is a good reminder that any future liquidity challenges could lead to further shareholder dilution.
Set against that is the attractiveness of Mitie’s business, which last year grew revenues to £2.6bn. The pandemic was a challenge, but the couple of years before it suggested Mitie had found a way to make money again after a period of losses. I like its long-term role in key infrastructure. While it may not be a glamorous industry, such facilities are important to a range of organisations. They will likely continue requiring management for years or decades to come. If Mitie can demonstrate renewed profitability, I think the Mitie share price could rise. A trading update last month was upbeat and the company upgraded its profit guidance for the year.
Penny shares with healthcare exposure
Healthcare is an area where I expect continue demand growth. One penny share that offers exposure to the long-term growth of healthcare is Assura (LSE: AGR). It’s a property company that specialises in renting to healthcare tenants such as doctors’ practices.
I like Assura’s business model because it involves long-term leases with reliable tenants who are able to pay their rent. Assura has passed the benefit of its success onto shareholders, with the shares currently yielding 3.9%. In recent years the company has consistently grown its dividend, and it made no exception during the pandemic. It pays out on a quarterly basis and so could be a welcome passive income stream to add to my portfolio. Dividends are never guaranteed, but Assura’s distribution history and cashflows boost my confidence in its attractiveness as an income pick.
One risk I see here is politics. Healthcare pricing and profits can be a controversial topic. That could suddenly limit the profitability of a business as heavily exposed to healthcare clients as Assura.
Stagecoach and a possible bid
One of the penny shares I hold in my portfolio and would consider buying more of is bus and coach operator Stagecoach (LSE: SGC). The shares have fallen around 3% today after the company announced a lengthened timetable for possible merger talks with rival National Express. Over the past year, though, Stagecoach shares have been in the fast lane, adding 86%.
Any merger proposal could spark a bidding war, which could herald more upside potential for the Stagecoach share price. But even if no bid materialises, I continue to see Stagecoach shares as attractive. It has a wide route network across the UK, often with little or no competition from other public transport providers. Transport is critical to national mobility, so the industry also benefits from a range of subsidies. During the pandemic, for example, that helped it fund services even with low passenger numbers.
There is a risk, though, that if a bid doesn’t materialise, investor sentiment will worsen. In that case, the Stagecoach share price might fall even if business results are sound.
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Christopher Ruane owns shares in Lloyds Banking Group and Stagecoach. The Motley Fool UK has recommended Lloyds Banking Group. 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.