Buying penny stocks can often be a risky endeavour. Many such low-cost shares can experience periods of extreme price volatility. The majority of these shares also have weaker balance sheets than other larger stocks, putting them in extra danger when times are tough.
However, penny stocks can also offer better-than-average returns if investors get it right. Buying into fast-growing companies early on offers a lot more share price upside than investing once they’re established.
Here’s a cheap penny stock I’m considering buying today. I think it could deliver exceptional shareholder returns over the next 10 years.
A value retail star
The pressure is rising on household finances and consumers will have to box clever to survive. One way they are likely to do this is by shopping at value retailers like N Brown Group (LSE: BWNG). This penny stock sells affordable clothing in wider size ranges than most others in the industry.
Recent trading at N Brown suggests the firm is already capitalising on the shopping budget squeeze. Sales of its core strategic brands (Jacamo, JD Williams, Simply Be, Ambrose Wilson and Home Essentials) rose 5.5% in the 18 weeks to 1 January.
On a headline level N Brown’s product sales dropped 3.5% year-on-year. However, this reflected the managed decline of its other non-core brands. Demand for N Brown’s main brands (which account for four-fifths of product turnover) is quite solid.
A dirt-cheap penny stock
My main fear for N Brown relates to signs of a worsening supply chain crisis. A recent survey shows that shipping delays into Europe from China are getting larger, and suggests the problem will last long into 2022. This raises the prospect of higher costs and emptier warehouse shelves for retailers like N Brown.
Still, it’s my opinion that the retailer’s rock-bottom share price reflects the danger this poses to profits. At current prices of 38.3p per share this penny stock trades on a forward price-to-earnings (P/E) ratio of 5.4 times for this financial year (to February 2022).
City analysts reckon N Brown’s earnings will drop 10% in this outgoing financial year. But they also believe the outlook is sunnier over the medium-to-long term. It’s why they believe annual profits will leap 13% and 21% in fiscal 2023 and 2024 respectively.
N Brown isn’t just in great shape to ride the growing importance of value to the modern consumer. I personally like its focus on selling products in two potentially-lucrative demographic areas: plus-size and mature shoppers.
The government estimates that one in five people will be aged 65 and above by 2030. This bodes well for N Brown’s Ambrose Wilson division, for example, a brand which it says “truly values the mature customer”.
Meanwhile the market for larger-size clothing is growing rapidly due to changing perceptions over health and beauty. Analysts at Allied Market Research think this market will grow at an annualised rate of around 6% between 2021 and 2027.
So I think N Brown could have the tools to deliver terrific shareholder returns during the next decade.