Acquiring penny stocks can be an excellent way to build exposure to smaller businesses. However, this approach also comes with risks. Smaller companies may lack the checks and balances in place at large corporations. This could expose investors to unnecessary challenges.
Still, I like to own a selection of penny stocks in my portfolio to build exposure to this part of the market.
As such, here are two companies I would be happy to buy and hold for the next decade.
Penny stocks to buy for growth
The first company I would buy is estate agent Foxtons (LSE: FOXT). I believe that focusing on enterprises operating in defensive markets is one of the best ways to reduce the risks of investing in small businesses.
The property market is not entirely defensive. But, in the UK, the property sector makes up such a large part of personal wealth it does not seem unreasonable to suggest that this industry will only grow in the decades ahead.
With its focus on the London market, Foxtons is better positioned than many of its competitors to capitalise on this trend. Over the past couple of years, the company has been going through somewhat of a transition. After a series of strategic missteps, the group plunged to a loss in 2018. And it then lost around £30m between 2018 and 2020.
However, City analysts expect the company to return to profitable growth in the next two years. So as the group builds on its recovery, I would buy it for my portfolio of penny stocks.
Challenges it could face going forward include a property market downturn and higher wage costs, which would almost certainly hit profit margins.
Premium market
Private jet broker Air Partner (LSE: AIR) is another company I would buy for my portfolio of penny stocks.
This firm’s profits jumped 100% last year as demand for private air travel and air cargo services surged. Management is using last year’s windfall to fund acquisitions, expanding the company’s footprint.
The growth strategy should help the enterprise grow its top and bottom lines as we advance. Further acquisitions could be on the cards, and as the business expands, I think the corporation will achieve substantial returns for investors over the next decade.
That said, air travel is a cyclical industry. Air Partner is trying to expand into more predictable sectors, such as safety, but its primary business of organising planes for wealthy customers still dominates. This suggests the company’s profits could collapse in an economic downturn.
Despite this risk, I am optimistic about the potential. With a debt-free, cash-rich balance sheet, it has the financial flexibility to acquire more businesses and expand its footprint. There is also the potential for additional shareholder returns as profits expand and cash flow grows. At the time of writing, the stock offers a dividend yield of 2.8%.
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.
