Penny stocks can offer great rewards to nimble investors like me. That said, with higher potential rewards comes greater risks. Even so, I’d consider these three penny stocks as a part of my diversified Stocks and Shares ISA.
In the driving seat
The first penny stock I’d buy in July is Vertu Motors (LSE: VTU). It’s the fifth largest car retailer in the UK with a network of 149 sales outlets across the country. It operates several dealership brands, but the one that most stands out to me is Bristol Street Motors.
It provided an update recently where it highlighted continued strong trading, driven particularly by the used cars segment. Its pleasing to see that it expects current trends to continue. This should bode well for the Vertu Motors share price, in my opinion.
That said, Vertu highlighted an industry issue at the moment where global chip shortages are causing supply problems for new vehicles. Although it’s a concern for new car sales, it’s also a key reason for robust used car sales. And it’s keeping used car prices elevated, helping Vertu further.
Risks also remain regarding Covid-19 disruption. There’s still much uncertainty around how consumers will behave once furlough payments come to an end.
Overall, this is a cheap penny stock, in my opinion. It trades on a price-to-earnings ratio of just 7 times forecast earnings. I like that it offers growing earnings in addition to a dividend yield of 3.6%.
Another car sector penny stock
For many of the same reasons as Vertu, I’d also consider Pendragon (LSE: PDG). It’s another car retailer. Differing from Vertu’s offering, Pendragon focuses on specialist and luxury franchises. It’s experiencing strong trading conditions too.
In its recent update, it highlighted a favourable environment in the used vehicle market. In particular, “supply constraints and pent-up demand have increased vehicle pricing, driving higher margins.” This sounds great to me.
A word of warning, however. As with Vertu, there continues to be uncertainty from Covid-19 restrictions and vehicle supply constraints. In addition, Pendragon makes the point that there could be some restriction of supply later in the year, with “vehicle order times already being extended”.
But I think broker upgrades are likely and there could be further upside to this penny stock.
A riskier penny stock I’d consider buying for my ISA in July is Jubilee Metals (LSE: JLP). It’s supported by growing platinum group metal (PGM) prices. In particular it has substantial exposure to copper prices.
The outlook for copper looks promising, in my opinion. The global drive to green energy and the electrification of vehicles will require significant investment in renewable energy infrastructure. Much more copper is used in an electric car compared to an internal combustion engine.
In addition, copper prices could be supported by post-pandemic economic stimulus and infrastructure spending.
It’s worth noting that while the longer-term demand factors for copper look promising, penny stocks in the mining industry can be high-risk. Metal prices are volatile, and can fluctuate for a number of reasons. This is a significant potential risk for Jubilee’s earnings.
Overall, I’d consider buying Jubilee Metals for a small part of my ISA.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon and Vertu Motors. 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.