I like to own a selection of penny stocks in my portfolio, as these companies can be fantastic growth investments. Unfortunately, there will always be a level of risk that these businesses may not perform as expected. That is why I try to diversify my portfolio, to spread the risk around.
As such, here are three penny stocks I would buy as growth investments today in a diversified portfolio.
Growth stocks to buy
Online travel agent Hostelworld (LSE: HSW) suffered a 76% decline in revenues for the first half of its 2021 financial year. Like almost every company in the travel sector, the group has been winded by the pandemic.
However, I am attracted to this organisation because it has fantastic recovery potential. At the end of June, the group reported a cash position of €33.7m. Administrative expenses for the period were around €13.5m, implying the business has the funding for at least 18 months before it runs into problems.
As an asset-light technology company, Hostelworld has a high level of operational gearing. This will produce high gross profit margins when revenues begin to tick higher. This gives the business headroom to weather the current uncertainty and prepare for growth in summer next year.
Of course, there is no guarantee the travel and tourism market will rebound in 2022. A lot depends on the course of the pandemic. Nevertheless, coronavirus cases have declined enough for governments to open international borders for the past two summers.
Recovery penny stocks
FirstGroup (LSE: FGP) and NewRiver REIT (LSE: NRR) are two other penny stocks with attractive outlooks.
These companies are facing severe headwinds. Therefore, there is a high level of uncertainty surrounding their recovery potential. As a retail landlord, NewRiver’s fortunes are tied to those of the retail sector. With brick-and-mortar retailers struggling to draw consumers back into stores, the outlook for this sector is highly uncertain.
At the same time, further coronavirus restrictions could limit public transport activity, which would only hold back FirstGroup’s recovery.
Having said all of the above, there are reasons to be positive. After slumping last year, commercial property values are rising as investors return to the sector. These properties are also attracting different types of tenants, helping landlords like NewRiver diversify.
What’s more, the government wants to encourage more consumers to use public transport in the long term, to reduce emissions and the number of cars on the road. This implies that while the near-term outlook for public transport operators like FirstGroup is highly uncertain, demand may increase in the years ahead.
Considering these potential tailwinds, I would be happy to add these companies to my portfolio of penny stocks. They may be facing plenty of risks in the near term, but the potential for growth over the next five-to-10 years seems attractive.
