When looking for penny stocks to buy, I tend to focus on companies that look cheap compared to their growth potential. Here are two businesses that have recently appeared on my radar, which I believe deserve a position in my portfolio.
Penny stocks to buy
As a recovery investment, Marston’s (LSE: MARS) looks to me to offer numerous attractive qualities. The pub operator has experienced a rebound in sales since the lifting of restrictions over the summer. According to its latest trading update, sales in the three months to 2 October had risen 2% across its managed and franchised pubs, compared to 2019 levels.
That is quite impressive when considering many consumers are not yet comfortable going out and about. The company’s sales are coming to about 94% of 2019 levels for the full year, which is quite a substantial number.
Unfortunately, even though the company’s sales have recovered, profits are still nowhere to be seen. High costs and financing charges are eating away at profit margins. This suggests the corporation is in a fragile position and could be highly susceptible to further coronavirus restrictions.
As such, the company may not be suitable for all investors. However, I would acquire it for my portfolio of penny stocks as a speculative recovery play. As the economy continues to rebound, I think Marston’s should continue to reap the rewards.
Commercial property values
Another recovery stock I would buy is NewRiver REIT (LSE: NRR). It has been a tough time to be a commercial landlord over the past 18 months. Commercial property values have collapsed, and so have rates of rent collection.
NewRiver has not been able to escape the pain. As a real estate investment trust, the group has to return the majority of its rental income to investors via dividends to qualify for special tax treatment.
Its dividend shows just how much of an impact the pandemic has had on the group. The payout dropped from 21.6p for the financial year ending March 2019 to 3p for the year ending March 2021, a decline of 86%.
But now NewRiver’s outlook is improving. For the first quarter of its current financial year, the group collected 87% of rent due. It has also raised more than £200m from asset disposals, reducing debt significantly below 40% of property value.
Even though the company remains at risk from further pandemic restrictions, which could destabilise its recovery, I think its outlook is improving. Despite this fact, the stock is cheaper today than it was at the beginning of March this year.
That is why I think this is one of the best penny stocks to buy right now. NewRiver’s balance sheet is getting stronger and rent collection improving, but the market seems to be ignoring these positive changes.
Therefore, I would buy the stock for my portfolio as a recovery play.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.