Should I buy these 2 penny stocks with a spare £1,000?

Andrew Woods has £1,000 to invest – should he turn to these two penny stocks that both display solid earnings growth?

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Although they can come with a higher risk profile, penny stocks can be a great way to find growth over the long term. In the past, I’ve bought a number of penny stocks – companies with a share price less than £1 – like Tullow Oil and Rolls-Royce that have performed well while I held them. 

I’ve now found two more that I’m considering adding to my portfolio with a spare £1,000. Let’s take a closer look. 

Impressive earnings growth

The share price of dotDigital (LSE:DOTD) has plummeted 68% over the past year, having fallen 16% in the last three months. Currently trading at 77.4p, it’s in prime penny stock territory.

The firm – a software platform provider for the marketing industry – has enjoyed stellar earnings growth over the past five years. 

Between 2017 and 2021, earnings per share (EPS) rose from 2.47p to 4.12p. By my calculation, this means that the business has a compound annual EPS growth rate of 10.8%. The AIM 100 index firm has clearly been growing profits at a fast pace over that time period.

For the year ended June, between 2020 and 2021, pre-tax profit was pretty flat, with a slight increase of £600k. 

The business has also recently signed a two-year deal with online security giant Adobe. This has the potential to promote dotDigital’s brand over the next couple of years. 

There is, however, the risk of a slowdown in the software-as-a-service (SaaS) sector following heightened demand during the pandemic. This may be compounded by the pressures of rampant inflation.

Consistently profitable

I’m also attracted to Pan African Resources (LSE:PAF) for its impressive earnings growth. It currently trades at 19.78p.

Between 2017 and 2021, EPS increased from 2.6p to 3.87p. This results in a compound annual EPS growth rate of 8.3%. 

For the year ended June, between 2017 and 2021, the company’s pre-tax profits also grew from £44.9m to £104.8m. While past performance is not necessarily indicative of future performance, these figures suggest that the business has been, and may continue to be, consistently profitable.

In April, the firm – a gold miner operating in South Africa – initiated a share buyback scheme worth £2.6m. While this may seem small, it’s still encouraging to see an AIM 100 stock embarking on such a plan. It’s yet another indicator that Pan African Resources is in a good financial state.

The company is commencing further drilling at its flagship Barberton Mine in South Africa, while starting exploration activities in Sudan.

There is always the risk, however, that future pandemic variants halt mining operations. 

Overall, these two firms have displayed strong and consistent earnings growth over the past five years. While there are risks, I will be using my £1,000 to add both businesses to my portfolio to hold for the long term. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Andrew Woods owns shares in Rolls-Royce. The Motley Fool UK has recommended dotDigital 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.

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