Penny stocks can produce huge capital returns for investors. Unfortunately, they can also deliver huge losses.
As such, I’m happy to invest in these companies but will only deploy a small amount of money, such as £3,000, into a well-diversified portfolio. I think this will help me reduce risk while maximising profitability.
With that in mind, here are three penny stocks I’d buy with £3k.
Penny stocks to buy
The first organisation on my list is the engineering group Lamprell (LSE: LAM). A leading provider of fabrication, engineering and contracting services to the offshore and onshore oil & gas and renewable energy industries, the company has struggled in recent years. The falling oil price has caused oil producers to cut expenditure. Lamprell’s sales have plunged as a result.
However, the company has recently been growing its renewable energy business. I think this will be a cornerstone for group growth as we advance. I also think the business will benefit from the general economic recovery over the next few years. Those are the main reasons why I would buy this penny stock for my portfolio now.
The main risk the corporation faces right now is the risk that the economic recovery does not live up to expectations. This could translate into further losses for the business and its investors.
Currency management firm Record plc (LSE: REC) handles currency risks for customers. In recent years, the group has been focusing on growing its higher-margin business lines. These efforts are expected to translate into earnings growth next year.
Analysts predict net profits of £8.5m in 2022, the highest level of income for the business in many years. That said, these are just projections at this stage.
The company faces multiple risks that could limit its ability to meet this target. Competition in the financial services market could impact the group’s profit margins. Additional regulations may also lead to increased costs, which would affect profits.
Despite these challenges, I would buy the shares for my portfolio of penny stocks, considering its potential in the next few years.
Digital inkjet technology
Xaar (LSE: XAR) develops digital inkjet technology, which is used for multiple printing applications. The group started to struggle in 2018, but it is forecast to achieve a steady recovery this year. This time last year, analysts were expecting the firm to lose more than £10m for the year. Losses of around £5.5m are now projected.
These are only projections, and Xaar may never live up to its full potential. Still, I think the stock has tremendous potential.
Of course, there is a significant risk the group will not meet City growth expectations. If it does not, investors may turn their backs on Xaar, as they did previously. The main risks to growth include high costs and competition. I will keep an eye on these challenges from now on.
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Rupert Hargreaves 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.