Penny stocks are often seen as risky investments. They can be priced quite low for a reason. Despite the risk, however, I believe some penny stocks could be good additions to my portfolio.
Penny stocks I like, #1
My first pick is Costain Group (LSE:COST). Costain Group is British technology based construction and engineering firm. The Covid-19 pandemic wasn’t kind to Costain. It reported a loss of £78m for 2020. As economies reopen, analysts are predicting earnings growth of over 20% in 2022. This should propel Costain back into the black.
Reviewing past financials, Costain has been a profitable business and I expect it to be profitable once more in the future. Past financials aren’t always a surefire indicator of future performance but I use them as a gauge of a firm’s capabilities.
I believe infrastructure spending will experience a boom in the coming years. Costain Group is one of a number of penny stocks that could benefit from this. At 57p per share, it is priced considerably below its pre-crash levels of 194p per share. It also sports a 5.5% dividend yield of 2021, which is enticing.
Investing in penny stocks comes with risks and Costain is no different. Its primary risk is the pandemic and virus causing further restrictions. If this occurs, growth predictions will turn into further loss reporting. Right now, I think Costain is a cheap stock to buy and I would be happy to invest a small sum of money for the long term and add Costain to my portfolio.
Penny stocks I like, #2
My second penny stock pick is Airtel Africa (LSE:AAF). It is a provider of telecommunications and mobile money services, with a presence in 14 countries in Africa, primarily in East, Central, and West Africa. Infrastructure spending in emerging markets such as Africa is expected to continue for many years to come.
There is lots to like about Airtel Africa as a penny stock option for my portfolio. It is currently priced at 77p per share, which is 11% higher than its price of 69p back in 2019 when it first floated on the FTSE. I consider this cheap based on its performance to date and past financials.
Last year saw Airtel Africa’s revenue increase by approximately 14% to $3,908m. Pre-tax profit increased by 17% to $697m. Growth is vital for penny stocks like this. I expect its growth journey to continue especially in an emerging market such as Africa. In comparison, established markets such as Europe have seen firms like BT and Vodafone struggling to boost profits.
Based on current levels, Airtel Africa shares trade on 11 times forecast earnings. A 4.9% dividend yield further tempts me towards picking this penny stock as a serious option for my portfolio.
As with Costain, there are risks involved in investing my money in Airtel Africa. Firstly, it is in a lot of debt. This usually raises a red flag with me. If interests rate rise, investment and earnings could be affected by spiralling interest payments. Next, it is not the only player in Africa. There is lots of competition out there, which could hinder its progress and market share.
Overall, I would be willing to invest some of my money for the long term into Airtel Africa and keep an eye on developments.
Jabran Khan 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.