Penny stocks have a bit of a bad reputation and for good reason. Many penny shares are small businesses, which may have weak balance sheets and uncertain outlooks.
However, not all penny stocks are bad investments. The definition of these investments is expansive, and even large businesses in the FTSE 250 can qualify as penny shares. With that in mind, here are three penny stocks I’d buy for my portfolio today.
The first company I’d buy is Tullow Oil (LSE: TLW). This is a high-risk recovery play. The oil price has recovered from its lows of the last year as the global economy has started to move on from the pandemic. This should translate into higher profits for the oil producer.
That said, it could be some time before Tullow’s revenues recover to a level that would stabilise the enterprise. Over the past few years, it has accrued a tremendous amount of debt, and paying this off could be a struggle. If the price of oil slumps again, it may not even be possible.
That’s why this is such a high-risk FTSE 250 recovery play. It’s certainly not suitable for all investors.
Penny stocks on offer
As well as Tullow, I’d buy Centria (LSE: CNA) for my portfolio. This is another company that’s really struggled over the past few years. The British Gas owner has seen its share price dwindle as profits and revenues have declined, and customers have gone elsewhere.
However, I think the group’s prospects could be about to change. Management has been focusing on paying down debt and selling non-core assets recently.
The rising oil price could also help the firm shift its North Sea oil and gas business, which has been on the block for some time. Selling this division would provide more capital for reinvestment and reducing debt.
However, the enterprise’s main challenges haven’t gone away. It’s still facing fierce competition from newer upstarts, and volatile commodity prices mean its income is unpredictable.
Despite these risks, I’d buy the company for my portfolio of penny stocks today.
Premier Foods (LSE: PFD) has been one of the pandemic’s biggest winners. Profits jumped to £47m in 2020 from a loss of £34m in 2019. Analysts believe profits could nearly double again this year, although that’s just a forecast at this stage.
The company was able to use its bumper profits last year to pay down debt and reduce its pension deficit. This should free up more cash in the years ahead to invest in the business. I think this could help the firm build on the progress over the last 12 months and drive earnings growth for many years to come.
That’s why I’d buy the FTSE 250 business for my portfolio of penny stocks today.
Having said all of the above, Premier is still loaded with debt. It’s also facing increasing competition from new brands. It needs to keep investing in its offering to keep consumers interested, or these brands may steal market share. That could hurt profits and the group’s ability to pay down debt.
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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.