Investing in penny stocks isn’t for the faint-hearted. While these companies can generate significantly higher returns than blue-chips, they also come with more risk.
The simple fact of the matter is that smaller companies have fewer checks and balances to stop problems from arising. As such, these companies may not be suitable for all investors.
However, I’m comfortable with the risks involved in investing in small businesses. Therefore, I’ve been looking for penny stocks to add to my portfolio to profit from the UK economic recovery.
Penny stocks I would buy
The first company on my list is Smiths News. The newspaper and magazine delivery business reported a resilient performance in 2020, despite the challenging environment. Revenues declined by just 12%. Thanks to this performance, the company’s balance sheet ended the year in a relatively strong position, with net debt falling 31%.
As the UK economy continues to reopen, I think the company’s fortunes may improve. That’s why I’d buy the business for my portfolio of penny stocks.
However, its most prominent risk is debt. Despite the reduction in debt last year, it still stands at five times earnings before interest, tax, depreciation and amortization (EBITDA). That’s quite high for my liking.
Two other recovery plays I’d buy for my portfolio of penny stocks are Speedy Hire and SIG. Both of these are construction sector firms. The former deals with equipment hire, and the latter sells materials. As the UK construction market rebounds, I think both may see rising profits and sales. That’s the reason why I’d buy these two penny stocks as recovery plays.
However, if the recovery starts to stutter, they may struggle. That’s the most considerable risk both companies face right now. But, unfortunately, they have almost no control over this headwind.
The UK property market is currently booming. As such, I’d also buy Foxtons for my portfolio. The estate agency group has performed better than management’s expectations over the past few months. This has allowed the business to resume cash returns. I think this trend could continue as transaction volumes remain elevated.
Finally, I’d buy Severfield for my portfolio of recovery penny stocks. As one of the UK’s largest steel companies, Severfield should benefit from any economic recovery. At the same time, steel demand may only increase as the government pushes ahead with its £100bn infrastructure plan. I think these two tailwinds could drive the company’s sales and profits higher as we advance.
Unfortunately, the company could also face headwinds in the form of higher commodity costs. In addition, Severfield’s costs may also increase if it has to pay more to offset the carbon produced by its steel operations. Both of these factors could hold back growth and offset the tailwinds outlined above.
Nevertheless, I believe this company could be an excellent addition to my portfolio of penny stocks for its recovery 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.