Investing in penny stocks — in other words shares that cost below £1 each — is rarely boring. But from an investment perspective, this is not always a good thing.
Low-cost UK shares like these are often traded in large volumes because of their cheapness. This can result in huge share price volatility and an investor can see the value of their holdings vanish in the blink of an eye. The lion’s share of penny stocks are also pretty small — at least compared with most other listed companies — so the chances of failure can be higher when trading conditions worsen.
Why I like low-cost UK shares
Investors such as me need to be aware of these dangers. But, in my view, they don’t make penny stocks a sub-asset class to avoid. Like all UK shares they expose you and I to a higher level of risk than, say, investing in a bog-standard savings account. With some decent research though it’s possible to minimise the risk and separate the truly great stocks from the dangerous duds.
I like penny stocks because they often tend to be smaller companies that have plenty of room to grow. Sure, their business models and the markets in which they operate can often be highly untested. But if these companies get it right they can soar in value over a number of years and make their shareholders a fortune in the process.
US tech giant Apple is perhaps one of the most famous ex-penny stocks which has now taken on legendary status. As recently as 2009, the iPhone maker’s shares traded inside penny stock territory of below $5. Today, they change hands for $171.70 apiece.
3 penny stocks I’d buy right now
In this first of two articles I will reveal eight of what I consider to be the best British penny stocks to buy right now. Here are the first three low-cost stocks I’m considering snapping up for my own shares portfolio (look out for Part 2 of this analysis tomorrow).
One way I’d seek to make money from the UK’s colossal homes shortage is to buy shares in Brickability Group (LSE: BRCK). The government will have to ramp up housebuilding activity over the next decade to meet strong and enduring buyer demand. I therefore expect profits at this brick-making penny stock to rise sharply.
Brickability is already making waves as housebuilders steadily ramp up their construction activity. Last month, the building materials supplier actually said trading was ahead of forecast for the year to March 2022. This follows news of “strong” order books across the business in December, and news that orders stood at record highs at Brickability’s roofing division.
Brickability doesn’t just make bricks. It also supplies doors, windows, flooring, and various other products that give it extra opportunities to capitalise on the homebuilding boom. And it has plenty of liquidity with which to boost its product ranges through acquisitions, a stage on which it has been active in recent times.
I like Brickability a lot, even though a downturn in the housing market is an ever-present threat. This could happen for example if the Bank of England raises interest rates sharply over the next couple of years.
Auto retailer Pendragon (LSE: PDG) could face revenue problems in the short-to-medium term if inflation continues to soar. Latest data from Barclaycard showed consumer card spending rose 7.4% in January versus the same month in 2020. This was the slowest rate of growth since April 2021.
Sellers of big-ticket items like new cars are particularly vulnerable when shopping budgets come under pressure. But I feel Pendragon’s used-car operations will help take the sting out of things. Cars remain essential commodities for many people and they will switch down to cheaper, pre-owned vehicles in tough times.
I like Pendragon because I think the number of electric vehicles (EVs) it sells will soar over the next decade. People are rapidly switching to these low-emissions vehicles on a combination of rising environmental concerns and increasing fuel costs. They’re tipped to keep rising in popularity too as they become cheaper to produce and, by extension, to buy as well.
The Climate Change Committee, an independent advisory body to the government, predicts there could be 18m EVs on British roads by 2030. That compares with the 400,000 or so right now. I think Pendragon’s one of the best-value penny stocks to capitalise on this booming industry. Today, the retailer trades on a forward price-to-earnings (P/E) ratio of below 7 times.
Metals miner Atlantic Lithium (LSE: ALL) is another penny stock whose profits could soar as EV sales balloon. The raw material it plans to pull from the ground in Ghana is widely used in the batteries that power these next-generation vehicles.
Mining for any natural resource is highly risky business. And it could be argued that Atlantic Lithium carries more risk than many others in the industry. Exploration work at its Ewoyya lithium project remains highly encouraging.
Indeed, progress on this front has lifted the share price 70% higher over the past year. But the business hasn’t actually pulled any of the material out of the ground yet. In the absence of any revenues it could be forced to take on more debt. It may even tap shareholders to continue its operations.
Still, it’s my opinion that Atlantic Lithium is worth the risk, given the rate at which lithium demand is tipped to boom. Analysts at Statista think annual worldwide lithium consumption will hit 1.79m tonnes by 2030. That’s up considerably from the 497,000 tonnes predicted for this year. The final figure could be even higher if lawmakers — many of which are straining to hit their climate targets — introduce fresh incentives to boost EV sales.