There are plenty of penny stocks I’m thinking of buying with my £20,000 ISA allowance for the brand new tax year.
These particular UK shares are dead cheap, costing less than £1 a pop. They are popular with those looking to ‘get rich quick’ because their prices can be extremely volatile and buyers can book a big profit fast. But of course, this sort of choppiness can be a double-edged sword. Penny stocks can end up costing investors a fortune.
I don’t think that this volatility makes penny stocks unsuitable investments, however. Those who take the time do some proper research can unearth some true beauties that could deliver solid shareholder returns over the long term. As the 2020 stock market shows, all UK shares exist under the threat of extreme and unexpected price volatility. But over a period of years, the cream usually rises to the top.
2 penny stocks on my ISA watchlist
Here are two top-quality penny stocks I’d add to my Stocks and Shares ISA right away.
As I’ve explained previously, the food-to-go market is expected to experience further rapid growth in the years ahead. As a consequence I think Bakkavor Group’s (LSE: BAKK) a great buy for long-term ISA investors like me. But it’s not the only reason as I also like the company’s plans to accelerate growth in the US. This is a region in which revenues soared 12.2% in 2020 despite the Covid-19 crisis that caused overall group revenues to drop almost 5%.
That said, Bakkavor sells its goods via a small number of customers in its core UK marketplace as well as in the US and China. This means a giant black hole can appear in its revenues column if it loses one of its key contracts. Still, I think this penny stock’s cheap valuation makes it a good buy right now. A price-to-earnings growth (PEG) ratio around or below 1 suggests that a UK share is undervalued. And today Bakkavor trades slap bang on that benchmark. Finally, the business carries an inflation-beating forward dividend yield of 3%.
I also believe that N Brown Group’s (LSE: BWNG) transformation to a pure e-retail company could deliver big shareholder profits this decade. The likelihood of a reduced need for Covid-19 lockdowns in the UK in 2021 could see total online sales drop year-on-year in 2021. But make no mistake, the outlook for e-commerce in the medium-to-long term remains packed with opportunity. And this penny stock’s focus on the growing demographics of plus-size and older customers could also pay off handsomely.
Today N Brown trades on a forward price-to-earnings (P/E) ratio of 9 times. This sits below the widely-accepted bargain-basement benchmark of 10 times. And I think this makes it a good UK value share to buy today. But it must be remembered that it comes with risks, such as the problem of rising raw material costs that threatens to damage margins, and the style missteps all fashion retailers work hard to avoid.
Royston Wild 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.