Compared to the glacial momentum of some FTSE 100 blue-chips, penny stocks have at least the potential to grow my wealth in a relatively short space of time. On the flip side, they can also deliver severe losses if I manage to back the wrong horse at the wrong time.
Out of favour
Tritax Eurobox (LSE: EBOX) is one example of such a penny stock I’d consider buying today. If the name rings a bell, it’s probably because the FTSE 250 is home to its UK-focused big brother Tritax Big Box.
Essentially, both companies do the same thing, namely own and manage logistics real estate — warehouses and distribution centres — for clients such as retailers. As its name suggests, Eurobox does this on the continent.
Given what’s happened to property values in general over the last year or so, it probably won’t surprise anyone to learn that this investment trust’s share price has been in the doldrums. Galloping interest rates were never going to go down well with the market.
However, I think the tide could be turning.
Huge dividends
Eurobox has climbed over 20% in value in the last month alone. This is clearly a result of the Bank of England’s decision to maintain rather than increase interest rates. Investors will surely be hoping that this pause is followed by a decision to cut at some point in 2024.
Naturally, no one can predict when this will happen. But Fools like me aren’t concerned with trying to time things precisely. The goal is to find stocks with great growth potential, buy when they’re cheap, and hold them for years.
Speaking of which, Eurobox trades for a little less than 11 times FY24 earnings. That looks reasonable to me, especially as the shares come with a monster 8.2% dividend yield.
Profit upgrade
If that’s a penny stock I’d consider buying, online electrical retailer AO World (LSE: AO) is one I’m happy to push away with a bargepole.
That might sound like an odd thing to say. The shares are up over 50% in 2023, so far. The company also recently raised its guidance on annual pre-tax profit to between £28m and £33m. The previous estimate was £28m on the dot.
On top of this, I appreciate the shares multi-bagged during the pandemic as everyone shopped for gadgets and white goods from home.
Where’s the moat?
The problem is that I still struggle to see how AO World can possibly deliver the gains I would want for the risks I’d be taking. This is, and I suspect always will be, a low-margin business operating in a cut-throat sector. If it had a competitive advantage over rivals, surely that would have become apparent in its nine years as a listed company.
The pandemic was also an extraordinary period that’s unlikely to be repeated anytime soon (we hope!). Tellingly, the price has now returned to where it once was. It also barely budged in response to the aforementioned profit upgrade.
This suggests to me that the valuation of 23 times forecast FY24 earnings is already (very) rich. A pullback could be on the way. And if that happens, there won’t be any dividend stream to compensate.
