Investing in penny stocks can be a great way to achieve high investment returns. Unfortunately, this can also be a way to lose a lot of money very quickly. As such, this strategy might not be suitable for all investors.
Many investors mistakenly believe that penny stocks are small companies and, therefore, riskier than blue-chip investments.
This isn’t entirely true. Any company can qualify as a penny share if its stock is trading for less than £1 (100p). This means even large businesses with multi-billion-pound valuations could be eligible.
With that in mind, here are three penny stocks I’d buy for my portfolio today.
Penny stocks to buy
Photo-Me International (LSE: PHTM) operates and sells so-called instance service equipment such as photo booths, vending machines and laundry machines. This business can be incredibly profitable. Between 2015 and 2018, the company reported an average profit margin of 21%. That’s four times higher than the market average.
Unfortunately, in the past two years, profits have plunged. However, management expects growth to return in 2021. The City is forecasting a net profit of £37m for the group this year, which is up from a loss of £2.3m in 2020. Of course, this is just a projection at this stage, but I think it shows the company’s potential.
That said, if Photo-Me doesn’t meet this target, the stock could slump. Another wave of coronavirus could destabilise the recovery. Another year of losses would put pressure on its balance sheet and prevent management from reinstating its dividend.
Nevertheless, despite these risks, I’d buy this company for my portfolio of penny shares today.
Engineering growth
One of my top investment themes for the next few years is infrastructure spending. On that theme, I think Costain (LSE: COST) could benefit from increased infrastructure spending in the years ahead.
The engineering solutions company reported an enormous loss of £78m in 2020. As the economy recovers from the pandemic, it’s expected to move back into the black this year. What’s more, analysts are projecting earnings growth of 21% in 2022.
This is far from guaranteed. Another coronavirus outbreak is the most considerable risk facing the business today. Another wave could inflict more losses on a group, setting its recovery back potentially years.
As with all penny stocks, this company isn’t for the faint-hearted. However, I’d buy it today as a way to invest in the infrastructure boom.
Property market
The final stock I’d buy for my basket of penny shares is Foxtons (LSE: FOXT). The London-based estate agent is benefitting from the UK’s housing boom.
In its latest trading update, the group said trading in the first two months of 2021 was “well ahead” of the prior-year period. It added that the pipeline of sales commissions was more than 30% higher than the same period in 2020. I think this shows the group’s potential for 2021.
While the property market is currently booming, there’s no guarantee this will continue. That’s the most considerable risk facing the business right now. A slump in transactions could decimate group income. There’s no telling if, or when, this may happen, which suggests the outlook for the company is highly uncertain.
Still, as penny stocks go, I think Foxtons is one of the best. That’s why I’d buy the firm today.
