When I am looking for penny shares to buy for my portfolio, I concentrate on finding high-quality investments. I am looking for businesses with a robust competitive advantage, a strong balance sheet and income potential.
One company that I believe meets all of these criteria is Centamin (LSE: CEY).
The Egypt-focused gold miner’s main competitive advantage is its relatively low production costs. On top of this, the organisation has a strong balance sheet stuffed full of cash and gold bullion. These qualities support the company’s attractive dividend yield, which is projected to hit 6.6% next year.
As well as these engaging qualities, Centamin is currently selling at a forward price-to-earnings (P/E) multiple of 11.4. Once again, I think this multiple only adds to the appeal of the stock.
Of course, the most considerable risk of buying any commodity-based company is that related prices could fall. In this case, Centamin’s earnings could decline if the gold price slumps. Despite this risk, I am attracted to the stock, considering its income potential, strong balance sheet and valuation. That is why I would buy the corporation for my portfolio of penny shares today.
Penny shares for growth
I would also buy Coats Group (LSE: COA). This firm’s competitive advantage is its size and reputation. The company, which supplies threads, zips and fasteners to the fashion industry, is also taking market share due to its focus on sustainability. Profit margins have risen back above pre-covid levels as customers are willing to pay more for sustainable products produced by the corporation and based on recycled or bio-degradable materials.
As well as this competitive advantage, the group also maintains a strong balance sheet and the stock supports a dividend yield of 1.4%, at the time of writing. The P/E multiple currently attached to the business is just 14.3. Like Centamin, I reckon this undervalues the enterprise.
Coats does have an advantage over some of its peers, but this is an incredibly competitive sector. There is no guarantee the company will be able to maintain its advantage. Trying to stay ahead of the competition is probably the biggest challenge the corporation faces in the long run.
Still, Coats has been able to maintain its market share in the past.
Finally, I would acquire Hostelworld Group (LSE: HSW) for my portfolio of penny shares. The pandemic has wreaked havoc on this company’s business model. Revenues plunged from €81m in 2019 to just €15m in 2020. Last year, the group racked up a total loss of €51m.
Considering the scale of these losses and the challenges Hostelworld faces, the stock might not be suitable for all investors. However, I would buy the shares as a recovery play. Looking at its historical profitability, I think the shares appear cheap today, based on its recovery potential.
Further, its balance sheet is weaker than I would like, but it should provide the group with the resources needed to drive a recovery. As the travel sector starts to rebuild, I think Hostelworld should see a strong rebound in earnings and sales.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Coats 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.