Penny stocks can play a role within a diversified portfolio. They’re higher risk, but they can produce explosive returns at times.
Here, I’m going to take a look at two penny shares that are flying right now, Costain Group (LSE: COST) and DX Group (LSE: DX.). Could these small-cap stocks be worth buying for my portfolio?
Value on offer?
Costain is a sustainable infrastructure solutions company. Operating across the UK’s energy, water, transportation, and defence markets, it offers consultancy and advisory services, digital technology solutions, and complex programme delivery. It currently has a share price of 61p and a market-cap of around £165m.
While this stock is up around 50% year to date, I think there could still be some value on offer here. Recently, Costain delivered solid H1 results with basic earnings per share (EPS) coming in at 4.4p versus 3.9p a year earlier.
On the back of this performance, the company – which had around £130m in cash on its books at the end of June – said it was considering the resumption of dividends, which were cancelled during Covid.
These developments don’t seem to be reflected in the valuation though. With analysts forecasting EPS of 10.8p for 2023, the forward-looking price-to-earnings (P/E) ratio here is just five.
Of course, that EPS forecast may not be accurate. To achieve 10.8p in full-year earnings, the company will have to have a big H2. And there are a few other risks to consider here too. This company has run into contract difficulties in the past.
However, overall, I think the stock looks very interesting. If I was a value investor (I’m more of a growth/quality investor), I would definitely consider buying it for my portfolio.
Growth at a reasonable price?
Turning to DX Group, it’s a UK delivery company that offers parcel freight, secure courier, and logistics services. Operating through two main business segments, DX Express and DX Freight, it serves the e-commerce, retail, health, optical, pharmaceutical, and legal and financial services industries. It currently has a share price of 36p and a market-cap of around £220m.
Now I can certainly see some appeal in this stock. In recent years, the company has grown at a healthy clip (three-year revenue growth of 33%). And looking ahead, analysts expect the growth to continue, with revenue for the year ending 2 July 2024 forecast to rise around 12% year on year.
Again though, the stock looks quite cheap. Currently, the forward-looking P/E ratio here is just nine.
One issue for me however, is debt. At the beginning of 2023, the company had total non-current liabilities of £96m on its books. This adds quite a bit of risk now that interest rates are much higher.
Given this big debt pile, the stock is a little risky for me at the moment. All things considered, I think there are better penny stocks to buy today.
