Some penny stocks have the potential for explosive growth. There are a few examples of former small-caps turning into FTSE 100 giants. JD Sports Fashion is a prime one that comes to mind.
I love hunting for small-caps that could potentially turn into giants, and provide me with capital growth and juicy returns along the way.
Two stocks I’m currently considering are Alternative Income REIT (LSE: AIRE) and DP Poland (LSE: DPP).
Making money from properties
Setting up as a real estate investment trust (REIT) means that firms like Alternative must return 90% of profits to shareholders. From an income perspective, this is very enticing.
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What I like about Alternative, compared to many other REITs, is the diversification it offers based on the assets it owns and rents out. Most REITs specialise in one type of property. Some examples are warehousing and logistics, social housing, and healthcare-related properties. Diversification is a great way to mitigate risk. Alternative’s diverse assets offer it a layer of protection if a downturn in one area were to occur.
Alternative shares offer a whopping dividend yield of over 8%. For context, the FTSE 100 average is 3.6%. However, I do understand that dividends are never guaranteed.
Finally, valuing the shares based on a net asset value of 80p per share, they’re undervalued by 14%, as they currently trade for 70p.
From a bearish view, higher interest rates are a worry, for a couple of reasons. Firstly, a volatile property market has dented net asset values, and could impact rent collection if tenants are struggling.
Next, REITs use debt to fund growth. When rates are higher, debt is costlier to obtain and existing debt is costlier to service. These issues could hurt earnings and returns.
As I love a dividend, I’d love to buy Alternative Income shares when I have some cash to invest.
Delicious growth stock
DP Poland owns the master franchise of Domino’s Pizza in Poland, and other surrounding regions.
Putting my love for pizza aside, the investment case is an intriguing one, in my view. DP has grown impressively since it opened its first franchise in Warsaw in 2011. At present, it owns 116 stores in Poland, and has branched out to neighbouring Croatia, with four in that territory. Looking forward, it is aiming to have 500 on its books by 2030.
DP has seen a gap in the market, as this geographical area is under-penetrated from a fast-food perspective. It looks to be capitalising, based on its growth to date.
However, I must note that the business isn’t turning a profit just yet. This isn’t uncommon for penny stocks. Plus, losses seem to be shrinking, which is a positive sign, and the firm continues to open new stores.
The obvious risk for me with DP is a lack of financial muscle — which I can keep an eye on through its balance sheet — and overstretching itself to grow the business that could hamper earnings and growth. There are examples of this with penny stocks littered throughout history. More often than not, the consequences can be fatal.
At just 10p per share, I’d be happy to invest a few quid despite these risks, and pick up some shares when I can.
This post was originally published on Motley Fool
