Should I buy this penny stock for long-term growth and returns?

This Fool takes a closer look at whether or not this penny stock could be a shrewd addition to her holdings for growth and returns.

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One penny stock I’m considering adding to my holdings is Surface Transforms (LSE: SCE). Could the shares boost my holdings or should I avoid them? Let’s take a look.

Brakes for cars

Surface Transforms develops, manufactures, and markets brake parts and components for automobiles and other vehicles. It has worldwide operations spread throughout the UK, Europe, US, and other parts of the world too.

It is worth remembering that a penny stock is one that trades for less than £1. As I write, Surface shares are trading for 32p. At this time last year, they were trading for 47p, which is a 31% drop over a 12-month period.

To buy or not to buy?

My research suggests that ownership of automobiles in the world is at the highest levels ever. In fact, it is estimated that there are approximately 1.474bn vehicles on the road, according to an automotive research agency. Although I’m not a car fanatic or expert, I do know that brakes are an essential component and this is where a business like Surface Transforms could benefit and capitalise.

Next, the world of brakes is changing as the products evolve through the use of carbon-ceramic materials. This is especially prevalent in electric vehicles and high performance vehicles. The surge in demand, especially for EVs, could benefit Surface as these are the types of brakes it specialises in.

Furthermore, Surface is in an exciting position as it has some patents pending for the application of this technology and this could help boost future performance.

Speaking of performance, Surface has a decent track record too. Although I do understand that past performance is not always an indicator of the future, I am pleased to see it has increased revenue and profit for the past three years.

As a penny stock, Surface is prone to more volatility than more established, larger businesses. This is where one of my bigger concerns comes from. There is a high likelihood that a larger, more established firm in the automotive space could be better equipped and come to dominate the brakes market, in my opinion.

Another issue I have for Surface is that of the current economic outlook. As the world economy struggles, could the rush towards newer and electric vehicles slow down? If so, this could negatively impact demand for Surface’s products as well as its performance and share price growth.

A penny stock I’m keeping on my watch list

I’ve decided to keep Surface Transform shares on my watch list for now. There is a lot to like about the business and things seem to be heading in a positive direction. Despite this, I want to learn a bit more about the business and see another couple of trading updates at the very least before revisiting my position. I especially want to see how the business is performing in more detail against the current backdrop of economic issues.

I’ll be keeping a close eye on developments at Surface Transform but I do like penny stocks, and already own a number of them as part of my holdings.

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 assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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