Penny stocks (those that trade for less than £1) tend to be higher-risk, speculative investments. These stocks can be highly volatile. And if you invest in the wrong companies, the losses can be significant.
Having said that, this area of the stock market can throw up some very lucrative investment opportunities. So, it shouldn’t be ignored completely, in my view.
Here, I’m going to highlight two UK penny stocks I believe are worth a closer look right now. Both companies are profitable and appear to have decent long-term growth prospects.
Strong growth track record
One penny stock I believe looks interesting at the moment is Alliance Pharma (LSE: APH). It’s a UK healthcare company that owns the marketing rights to around 80 consumer healthcare brands and prescription medicines. Some of its key brands include Kelo-Cote, Nizoral, and Amberen.
What stands out to me about Alliance Pharma is that the company had a good long-term growth track record. Over the last five years, revenue has increased by around 170%. Revenue did take a small dip last year (which isn’t surprising given the environment). However, it’s expected to bounce back this year. For FY2021, City analysts expect top-line growth of 28%.
I also like the fact the company is profitable and pays a dividend. Quite often, penny stocks don’t. For FY2020, the company declared a full-year dividend payout of 1.61p. That’s about 46% higher than the one declared five years ago. At the current share price, the yield is about 1.7%.
There are plenty of risks to the investment case here, of course. A poor acquisition could set the company back significantly. Currency risk is also worth mentioning as the group generates substantial sales abroad.
However, the company appears to be confident about the future, stating recently that it looks forward to “regaining the strong momentum and revenue growth that the group has enjoyed in recent years.” So, I think it could be worth a closer look right now.
This penny stock just declared its first dividend
Another UK penny stock I believe is worth highlighting right now is EKF Diagnostics (LSE: EKF). It’s a leading global medical manufacturer that specialises in point-of-care and central lab devices. Its products are used in hospital and research laboratories, doctor’s offices and blood banks in more than 100 countries. EKF also manufactures and distributes products related to Covid-19.
EKF recently posted a very strong set of 2020 results that were boosted by its Covid-19-related activities. For the year, revenue was up 45% to £65.3m while profit before tax was up 180% to £15.4m.
As a result of this strong performance, the company declared a maiden dividend of 1p per share. The company also said it’s confident trading for the year ending 31 December will be “significantly ahead” of already-upgraded management expectations.
I don’t expect the company to keep growing at this prolific rate forever. Post Covid-19, sales and earnings growth are likely to normalise. It’s worth noting that if future growth is disappointing, the share price could fall as the stock has enjoyed a strong run over the last year.
Right now however, the company appears to have a lot of momentum. And after declaring its first dividend, I think it could be worth considering as part of a diversified portfolio.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Alliance Pharma. 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.