Investing in penny stocks can be a great way to get high investment returns. Unfortunately, this can also be a way to lose a lot of money very quickly. Therefore, this strategy may not be suitable for all investors.
Many investors mistakenly believe that penny stocks are small businesses and therefore riskier than blue chip investments.
That is not completely right. Any company can qualify as a penny share if its stock trades for less than £ 1 (100 pence). This means that even large companies with a multi-billion pound valuation could be eligible.
With that in mind, here are three penny stocks that I would buy for my portfolio today.
Penny stocks to buy
Photo-Me International (LSE: PHTM) operates and sells so-called instance service devices such as photo booths, vending machines and washing machines. This business can be incredibly profitable. Between 2015 and 2018, the company achieved an average profit margin of 21%. That is four times higher than the market average.
Unfortunately, profits have been going down over the past two years. However, management expects growth to return in 2021. The city projects net income of £ 37m for the group this year, down from a loss of £ 2.3m in 2020. Of course, this is only a forecast at this stage, but I think it shows the company’s potential.
That said, if Photo-Me doesn’t achieve that goal, the stock could fall. Another wave of coronavirus could destabilize recovery. Another year of losses would put pressure on the balance sheet and prevent management from reinstating its dividend.
Despite these risks, I would buy this company for my portfolio of penny shares today.
Technical growth
One of my main investment topics for the next few years is infrastructure spending. On this subject I think Costain (LSE: COST) could benefit from higher infrastructure spending in the coming years.
The tech solutions company posted a massive £ 78m loss in 2020. As the economy recovers from the pandemic, it is expected to be back in the black this year. In addition, analysts are forecasting earnings growth of 21% in 2022.
This is far from guaranteed. Another coronavirus outbreak is the biggest risk the company faces today. Another wave could inflict more losses on a group and potentially set its recovery years back.
As with all penny stocks, this company is not for the faint of heart. However, I would buy it today to invest in the infrastructure boom.
Real estate market
The last stock I would buy for my basket of penny shares is Foxtons (LSE: FOXT). The London-based real estate agent is benefiting from the UK property boom.
In their latest trading update, the group said trading in the first two months of 2021 was “way ahead” of the same period last year. It added that the sales commission pipeline was more than 30% higher than the same period in 2020. I think this shows the group’s potential for 2021.
While the real estate market is currently booming, there is no guarantee it will stay that way. This is the company’s greatest risk at the moment. A collapse in transactions could decimate corporate income. There is no telling if or when this can happen, suggesting the outlook for the company is highly uncertain.
Even so, I think Foxtons is one of the best when it comes to penny stocks. That’s why I would buy the company today.
Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. Views on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking diverse insights into account makes us better investors.