Here’s one under-the-radar penny stock up 38% in a year investors should consider buying

This Fool explains why this penny stock has seen its shares rise in recent months against the backdrop of a gloomy macroeconomic outlook.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Black man sat in front of laptop while wearing headphones

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A penny stock that has quietly performed well recently is Costain Group (LSE: COST). Let’s take a look at why and if it could be a good addition to my holdings.

Infrastructure

Costain is an infrastructure business that provides engineering and technology solutions to its clients. It is split over two divisions, which are transportation and natural resources. Transportation covers highways, rail and nuclear markets. Natural resources covers water, power, oil and gas markets.

It is worth remembering that a penny stock is one that trades for less than £1. Costain shares have been on a great run in recent months. As I write, they’re trading for 58p. At this point last year, they were trading for 42p, which is a 38% rise over a 12-month period. Although the share price cooled during the summer due to macroeconomic pressures, after interim results in August, it took off once more to current levels.

To buy or not to buy?

Costain has delivered excellent interim results announced in August for the six months ended 30 June 2023. Whilst revenue stayed consistent compared to the same period last year, operating profit and margin both increased. Furthermore, net cash increased substantially and plans for dividend resumption were being discussed. Its order book looks strong and the balance sheet has been solidified in recent months too. Projections indicate a profitable year is on the cards.

A couple of weeks after Costain’s results, it announced an interim dividend of 0.4p per share. This gives it a dividend yield of 0.7%. Any penny stock that can pay a dividend grabs my attention. I’m interested in seeing if it can continue to payout consistently. However, I do understand that dividends are never guaranteed.

Next, Costain shares look cheap to me on a price-to-earnings ratio of just seven.

Looking at some of the risks that could hinder Costain, operating margins are a worry for me. They look very slim. Performance, payout, and investor sentiment could be negatively impacted.

Another issue for me is Costain’s chequered past. Although I do understand past performance is not an indicator of the future, it has experienced contract issues in the past, which have impacted performance, sentiment and returns. I’ll be keeping a close eye on developments.

A penny stock I’d buy

To conclude, there is no doubt to me that Costain shares have been on a great run in recent times, especially when you consider how many other stocks have performed due to market volatility.

For me, a passive income opportunity, albeit a small one, a decent valuation and positive trading are all plus points for Costain. Furthermore, infrastructure spending is heading towards all time highs. This tends to happen during times of economic downturn as it can help stimulate an ailing economy. In turn, this could help boost Costain shares too.

Overall I would be willing to add a small number of Costain shares to my holdings when I next have some cash to spare. I wouldn’t expect Costain shares to double my money overnight but it could be a good addition to my diversified portfolio of stocks.

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.

More on Investing Articles

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

A Q1 trading update pushes the Beazley share price up a bit more. Is it still cheap?

The Beazley share price has been motoring up in what might turn out to be the start of a 2024…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Prediction: this will be the FTSE 100’s next great stock!

This FTSE 250 stock has more than doubled in value during the past five years. Our writer thinks it could…

Read more »

Yellow number one sitting on blue background
Investing Articles

Billionaire Bill Ackman has just 1 magnificent AI stock in his FTSE 100-listed fund

Our writer takes a look at the only AI stock held in the portfolio of FTSE 100-listed Pershing Square Holdings.

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

2 penny stocks this Fool thinks could deliver phenomenal returns!

Penny stocks are a risky but exciting asset class to invest in, prone to wild volatility. Our writer thinks he's…

Read more »

Buffett at the BRK AGM
Investing Articles

I’ve just met Warren Buffett’s first rule of investing. Here are 3 ways I did it

Harvey Jones has surprised himself by living up to Warren Buffett's most important investment rule. But is his success down…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

Down 51% in 2024, is this UK growth stock a buy for my Stocks and Shares ISA?

Ben McPoland considers Oxford Nanopore Technologies (LSE:ONT), a UK growth stock that has plunged over 80% since going public in…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

These 3 growth stocks still look dirt cheap despite the FTSE hitting all-time highs

Harvey Jones is hunting for growth stocks that have missed out on the recent FTSE 100 rally and still look…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Here’s how much I’d need to invest in UK income stocks to retire on £25k a year

Harvey Jones is building his retirement plans on a portfolio of top UK dividend income stocks. There are some great…

Read more »