I think investing in British penny stocks could be a good way to capitalise on the country’s economic recovery over the next few months and years.
With that in mind, here are two penny stocks I would buy for my portfolio today with £3,000 of investment.
Penny stocks to buy
The first stock on my list is Topps Tiles (LSE: TPT). All indicators point to the fact that the UK construction industry is firing on all cylinders. I think this business could profit from this trend.
There are already some signs that the business has returned to growth. Total revenues for the 26 week period ending 27 March 2021 increased by 2% on a like-for-like basis.
Management is expecting a sharp increase in sales and profit margins over the next few months as restrictions on the economy are lifted. City analysts appear to agree. They are projecting a net income for the group of £6.5m for 2021, compared to a loss of £8m for 2021.
As well as this return to growth, I’m also encouraged by the company’s strong, debt-free balance sheet. And I’m not just encouraged by the organisation’s near-term outlook. Over the next four years, management wants to take Topps’s share of the market from 17% to 20%.
Of course, this won’t come easy. The company will have to spend money to meet this objective. It could end up spending too much or over-expanding. This would depress profit margins and could lead to losses. As well as this challenge, there is always the potential for yet another lockdown.
Despite these risks, I’m encouraged by Topps’s potential. That’s why I would buy the company for a portfolio of penny stocks today.
I think it’s rare to find penny stocks with the growth potential of companies like DWF (LSE: DWF). This law firm provides a range of legal services for its clients. Since its IPO at the beginning of 2019, the stock has underperformed the market. It barely got a chance to prove itself before the pandemic decimated profits. But now the economy is starting to recover, I think DWF’s outlook is improving.
Analysts expect the group’s income to hit £26m in 2022, up from £10m in 2020. These are just projections at this stage, and there’s no guarantee the company will hit these targets. However, I think these figures show the firm’s true potential.
And based on these forecasts, shares in the company are dealing at a forward price-to-earnings (P/E) multiple of just 8.8. I think that looks cheap compared to the wider market average of 16.
The main risk hanging over the stock today is its high level of debt. At the end of its last financial period, net debts totalled £137m. DWF’s market capitalisation is only £273m. If creditors lose confidence in the business, it could struggle to repay this borrowing and may have to ask shareholders for extra cash.
Still, I would buy the shares for my portfolio of penny stocks based on DWF’s growth potential.
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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.