If I had a lump sum of £10,000 to invest right now, I would acquire a basket of penny stocks. I would use this approach because I already have a diversified portfolio of blue-chip stocks and funds.
I think a diverse portfolio of smaller companies would fit nicely alongside these investments and provide exposure to potentially faster-growing enterprises.
As the UK economy wakes up from the pandemic, I would like more exposure to these smaller firms. Especially domestic businesses, which will benefit from the UK’s economic recovery.
Penny stocks: risks
However, investing in penny stocks can be risky. While these companies can generate higher returns than their blue-chip peers, they can also produce losses for shareholders.
In fact, these smaller companies are much more likely to fail because they may lack the checks and balances that are in place at larger enterprises. They may also struggle to access financing during periods of economic stress.
Still, I am comfortable with the risks of buying these smaller businesses. And with that in mind, here is a selection of penny stocks I would acquire with a lump sum of £10,000 today.
Growth potential
The first company on my list is Hammerson (LSE: HMSO). This company which owns a portfolio of commercial property assets across the UK, predominantly in the retail space, almost collapsed last year.
During the pandemic, retailers across the country were forced to close, and landlords were prevented from evicting tenants who declined to pay their rent. This hit commercial property owners particularly hard.
The sector was already struggling with the rise of e-commerce before the pandemic and declining occupancy as well as rent levels. Not only has the pandemic caused significant financial stress across the retail industry, but it has also accelerated the shift towards e-commerce.
The good news is, it appears that these trends are starting to dissipate. According to recent trading updates from Hammerson’s larger peers, Britsh Land and Landsec, there is a healthy level of interest in commercial property from institutional investors, pushing up property values. Levels of rent collection have also returned to near pre-pandemic rates.
Footfall recovery
Hammerson’s latest trading update (published at the end of October) showed that footfall to the company’s retail properties was around 15% to 20% below 2019 levels in September on October. On the key August bank holiday weekend, footfall even exceeded 2019 levels. Rent collection rates have also improved to around 70%.
Of course, there is a risk that this trend could go into reverse. Further coronavirus restrictions, or an economic slump, could hurt consumer demand. This is probably the most considerable risk the group faces right now. It is impossible for me to say how additional coronavirus restrictions would impact Hammerson’s recovery.
Considering the recent updates from Britsh Land and Landsec, I think Hammerson’s trading performance has continued to improve. That is why I would acquire the firm for my portfolio of penny stocks today.
Booming market
Alongside retail landlord Hammerson, I would also acquire Pendragon (LSE: PDG) for my portfolio.
The automotive retailer has faced significant headwinds over the past two years, but it is currently riding the tailwinds of a booming second-hand car market.
Due to the limited supply of new vehicles, a side effect of the global supply chain crisis, demand for second-hand cars has exploded. This is a great operating environment for companies like Pendragon, which specialises in second-hand and new vehicles.
Over the past couple of months, the group has repeatedly increased its underlying profit expectations for the whole year.
At the end of July, the company informed investors that it was expecting underlying profit before tax for the year ending December 2021 to be between £55m and £60m. At the beginning of October, management hiked this target to approximately £70m.
Champion of penny stocks
With figures showing that demand for second-hand vehicles is not letting up, I think this figure could be conservative.
The trend of rapidly appreciating second-hand vehicle prices is unlikely to continue indefinitely. Still, when the supply chain issues resolve themselves, Pendragon is well-placed to shift to offering new vehicles.
The company is exposed to the same risks as Hammerson. Another economic downturn or further coronavirus restrictions could hurt vehicle demand. Inflationary cost pressures may also weigh on group profit margins, impacting growth.
Infrastructure growth
The final company I would buy is the smart infrastructure group Costain (LSE: COST).
The UK government has earmarked tens of billions of pounds in spending for infrastructure projects over the next few years. I want some exposure to this mammoth capital outlay. I think one of the best ways to do this is to buy infrastructure companies like Costain.
After falling to a loss last year, the company is back on the road to recovery. Its profit before tax increased to £9.4m on an adjusted basis for the first half of 2021. Meanwhile, adjusted revenues increased 2% to £556m.
Plenty of cash
Unlike many other construction and infrastructure businesses, Costain does not rely on debt. At the end of June, it had a net cash position of £113m. This gives the group plenty of financial flexibility to pursue its growth ambitions and capitalise on new opportunities.
Unfortunately, this does not make the business immune to the general risks of operating in the construction sector. This sector is usually the first to suffer in any economic downturn. Rising materials costs may also place the company’s profit margins under significant pressure. This could become especially damaging if the group has signed fixed-price contracts with customers.
Despite these risks, I am optimistic about the company’s potential. I would buy the shares today as a way to invest in the UK infrastructure boom.
