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Investing in penny stocks can be challenging, especially when looking for companies to buy and hold for the next decade. 

When I am researching smaller businesses to buy for my portfolio, I try to concentrate on firms that exhibit a robust competitive advantage. These should be able to better compete in their respective markets.

To put it another way, they should be able to navigate the challenges of the business environment without having to ask shareholders for extra cash. And based on these qualities, two penny stocks are currently attracting my attention as undervalued growth companies. 

Recovery investment

The first company on my list is Hostelworld (LSE: HSW). This is a recovery investment. The business is a leading global online travel agent focused on the hostel market. But as investors might expect, the firm has been struggling over the past couple of years.

However, it is now returning to growth. According to its latest trading update, in October of last year, net booking values across its platforms exceeded 2019 levels. Unfortunately, the impact of the Omicron variant destabilised this recovery.

Nevertheless, last year’s numbers show that consumers are waiting to return, which could bode well for the enterprise in 2022. 

There are plenty of challenges on the horizon. The pandemic is not over just yet. New variants and disruptions could hit the company’s recovery. The cost of living crisis may also impact the demand for holidays, and Hostelworld will almost most certainly feel the impact of this. 

Still, with over €25m of cash on the balance sheet, the company has the resources to weather any uncertainty and capitalise on the global economic recovery. As the corporation looks to consolidate its position in the global hostel booking market, I think it has strong growth potential over the next 10 years. 

Penny stocks for income and growth

Taylor Maritime Investments (LSE: TMIP) is a somewhat unique offering in the world of penny stocks. It is a specialist dry bulk shipping company that owns a portfolio of 31 vessels contracted out to clients across the globe. 

These vessels transport bulk commodities such as iron ore. The shipping industry is one of the main arteries of the global economy and is currently experiencing a boom in demand as countries worldwide try to rebuild from the pandemic. 

This industry is highly cyclical. That is probably the biggest challenge this business faces. It is experiencing favourable tailwinds right now, but if shipping rates suddenly drop through the floor, the enterprise might have to take evasive action. 

Still, the corporation is generating a lot of cash in the meantime. That is why I would buy the shares for my portfolio of penny stocks. Management targets a 7% dividend yield on the company’s issue price of 100p. There is no guarantee it will hit this target, but with the stock trading below this level, it looks attractive as an income investment. 

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.

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It’s no secret that the pandemic has decimated the travel sector, and easyJet (LSE:EZJ) shares are no exception. The stock had enjoyed a seemingly stellar 2019, only for it to come crashing down the following year.

With Covid-19 forcing governments to close borders, the collapse of easyJet shares in early 2020 is hardly surprising. But today, the situation has improved. With vaccine rollouts making good progress across Europe and new variants being less severe, the number of travellers is back on the rise, as is this stock.

So, will the share price return to its former highs? And how much would I have today if I’d bought £1,000 worth of easyJet shares after it crashed? Let’s explore.

The ongoing recovery of easyJet shares

Between mid-February and the end of March 2020, easyJet shares had collapsed from 1,277p to 443p. That’s a horrifying 65% crash within a few weeks. Since then, the company has managed to start repairing the damage caused by the pandemic.

The first-quarter trading update showed that passenger capacity has recovered to 64% of 2019 levels. Obviously, there’s still a long way to go, but it’s a significant improvement from the 18% level a year prior. Meanwhile, thanks to this increase in traffic and reduced operating cash burn, the headline pre-tax loss came in at £213m for the quarter – a 50% year-on-year reduction.

Needless to say, this is all rather positive. So, it’s no shock that easyJet shares have been trending upward. Today, it’s trading around 674p. Therefore, a £1,000 investment at the end of March 2020 would now be worth around £1,521. And this will likely continue to rise if the business can continue on its current recovery trajectory.

The risks that lie ahead

As encouraging as these latest results are, I still have some concerns about this business. First and foremost is the possibility of a resurgence. Covid-19 has proven its ability to mutate and become more infectious. If a new variant emerges that is more harmful, border closures could once again come into effect, disrupting the company’s recovery progress.

But even if this doesn’t happen, easyJet shares could take several years to return to their former glory due to the weakened balance sheet. With the income stream compromised, management was forced to take out additional loans to keep the lights on at the height of the pandemic.

Consequently, the business now has around £4.4bn of loan obligations on the books. And that’s sent the annual interest bill through the roof. Even if the company fully restores its revenue stream, the bottom line will likely remain depressed due to margin pressure from the increased interest fees.

What’s more, as profits remain in the red, the group’s reliance on debt financing is unlikely to change until cash flows are restored. And while the last of loan maturities for 2022 have been wiped out, the poor level of solvency remains a weak spot for easyJet shares, in my opinion.

The bottom line

All things considered, I’m not tempted to add this business to my portfolio. It’s possible that easyJet shares can make a full recovery over the long term. But personally, I believe there are far better buying opportunities for my portfolio elsewhere.

Zaven Boyrazian 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.

Penny stocks are a risky section of the stock market. These often-tiny businesses typically have limited resources and an unproven business model. That’s why many are so small in the first place. But every once in a while, a few gems emerge from the sea of mediocrity. And if successful, these can deliver monstrous returns for my portfolio.

The deadline to maximise my Stocks and Shares ISA is fast approaching. And now seems like the perfect time to explore such opportunities. With that in mind, here are two penny stocks that I think could be risky, but lucrative, candidates for my portfolio.

Profiting from scientific innovation

Scientific experiments lie at the heart of research & development for engineering and pharmaceutical-led firms. Most of this can’t be completed without the proper equipment. That’s where Judges Scientific (LSE:JDG) steps in. The company is a designer and manufacturer of specialist scientific instruments used worldwide, from the perfume labs of L’Oréal to the CERN supercollider.

This market is highly fragmented, with many players specialising in different fields. However, Judges Scientific is fairly unique since it targets a wide range of applications thanks to being a serial acquirer of pre-established businesses.

This bolt-on strategy has proven to be highly lucrative for the penny stock, with profits growing by an annual average of 27% since 2017. And that includes the adverse effects of the pandemic and subsequent supply chain disruptions.

Of course, acquisition-based growth strategies come with their fair share of risks. Suppose management makes a series of poor decisions, and newly acquired firms fail to meet performance expectations? In that case, its impressive growth track record could come grinding to a halt while simultaneously compromising its balance sheet.

Despite this threat, the penny stock seems to have prudent leadership at the helm. And with the need for scientific instruments unlikely to disappear any time soon, I think this business could be an excellent addition to my portfolio.

A penny stock with explosive potential

Staying on the theme of science, Solid State (LSE:SOLI) is another penny stock that caught my attention this week. The group is a designer, manufacturer, and supplier of electronic devices and components to the defence, energy, medical, and transportation industries.

Historically, Solid State has targeted small and medium-sized businesses. It handles projects too complex for clients to perform in-house but too small for the larger electronics companies to be interested in. However, following a series of recent acquisitions, the firm has drastically expanded its product portfolio and manufacturing capacity. And it’s already landed multi-million dollar contracts with clients like BAE Systems as a result.

With profits growing consistently by double-digits over the last five years, even during the pandemic, I’m not surprised to see the stock climb nearly 60% in the past 12 months. But even with this impressive track record, there remain plenty of risks ahead.

The most prominent threat at the moment seems to be supply chain disruptions. With the cost of raw materials increasing and availability running thin. Solid State may start losing customers to larger electronics firms with more robust supply lines.

Despite this risk, the growth opportunity looks highly lucrative, in my opinion. And that’s why I’m considering this penny stock for my portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Judges Scientific. 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.

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The past few years have seen a sharp increase in business at warehousing and delivery company Clipper Logistics (LSE: CLG). That has been good for the Clipper Logistics share price. It has increased 56% over the past year. Now news of a takeover offer has pushed the shares to an all-time high.

What might happen next?

Right place, right time

Clipper had already been building an attractive business with its warehousing, fulfilment and management of online deliveries and returns. With the growth of digital commerce, the company’s expertise was set to help it profit. The past couple of years have sped up Clipper’s development, with a surge in demand for the sorts of services it offers.

That investment case helps explain the increase in the Clipper share price in recent years. The company offers investors exposure to the growth in digital commerce, but does not tie them to the fortunes of a single retailer.

Clipper takeover offer

Investors are not the only people who have been watching Clipper’s rise with interest. The fragmented online fulfilment industry is ripe for consolidation. Some companies have been growing their global presence. One such firm is US-based GXO Logistics. GXO is already a big player in outsourced warehousing and logistics. It is seeking to expand its international business and Clipper looks like a fit for its strategy.

Clipper announced today that its directors have agreed to the key terms of an offer for the company by GXO. The offer is in cash and shares. The cash component is £6.90 per Clipper share. The share component is effectively £2.30 worth of GXO shares for each Clipper share. So, the offer values Clipper at £9.20 per share. In this morning’s trading the Clipper share price reacted positively to the announcement, moving up to £9 at one point. Although the companies’ boards have agreed the key terms, that does not mean an offer is actually on the table at this point. So there is no guarantee that GXO will definitely make such an offer.

What comes next

Although Clipper’s board has accepted the key terms, the final say in such matters rests with shareholders. I would expect most Clipper shareholders to back the deal if it proceeds, given its attractive terms. In that case, the share price between now and the deal closing will likely hover close to the offer price.

Another company could make a hostile offer and try to trump GXO. To be successful, I think they would need to make a materially higher offer than the GXO one. The board’s support for a GXO offer makes such a bid less likely in my view, but it could still happen. If it did, that could drive the Clipper Logistics share price even higher.

My next move on the Clipper Logistics share price

I have always been impressed by the Clipper business but had concerns that its valuation made it a bad fit for my portfolio. It is now trading on a price-to-earnings ratio of 40, which for a logistics business I think is expensive. I believe the shares should hold roughly their current price unless the GXO bid fails to proceed. If that happens they could fall sharply.

So, after the recent run-up in the Clipper Logistics share price, I will not be adding the company to my portfolio.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Clipper Logistics. 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.

In my opinion, buying equities for dividend income is one of the most straightforward ways of producing a passive income.

That is why I own a portfolio of income stocks. I have been buying these shares to generate a passive income with dividends. My overall aim is to create £1,000 a month in earnings. 

Unfortunately, this will not happen overnight. It could take some time for me to build a pot big enough to generate a passive income of £1,000 a month.

According to my calculations, for an income of £1,000 a month or £12,000 a year, I will need to build a portfolio worth £200,000. That is assuming I can buy stocks with an average dividend yield of 6%. 

Investing for growth 

To hit this target, I have been acquiring growth stocks. This might seem counterintuitive. If I am looking for income, growth stocks are usually the last place to look. Many companies focusing on growth reinvest all of their money back into the business rather than distributing profits to investors. 

However, by focusing on growth companies, I believe I can achieve a higher return on my investment initially. This could help me to hit my £200,000 dividend income portfolio target in a shorter time frame. 

I believe a 10% per annum return by investing in companies such as Games Workshop and Bunzl. Both of these businesses have robust competitive advantages. These advantages allow the businesses to earn above-average profit margins. They can reinvest these profits back into growth initiatives such as acquisitions and new production facilities. 

Of course, there is no guarantee these businesses will hit my return target. Any number of factors could hold back growth. Challenges such as inflation, competition, and supply chain disruption could all hit profit growth over the next few years. 

Still, if I can hit my return target, I estimate I will only need to put away £1,000 a month for 10 years to build a nest egg worth £200,000. 

A switch to dividend income 

When I have hit the target, I can switch from growth to dividend income. To hit my £1,000 monthly goal, I will be targeting companies like Phoenix Group. This life insurance policy manager handles its assets to generate cash for investors and reinvest in growth. Thanks to this policy, the stock currently offers a dividend yield of more than 6%. This is why I believe the corporation is one of the best income stocks available on the market today. 

That being said, as dividend income is paid from company profits, it can never be taken for granted. This does not just apply to Phoenix. Any enterprise that delivers a dividend to investors might have to reduce its distribution if costs rise significantly and profits drop. That is one of the significant risks with investing for dividend income. 

Despite this risk, I believe the strategy outlined above can help me hit my income goals. That is why I plan to follow this approach over the next decade. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl and Games Workshop. 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.

UK shares are having a good run at the moment and outperforming other equity markets. This year, the FTSE 100 index is up about 3%. By contrast, America’s S&P 500 index is down about 9%.

While there’s no guarantee that the Footsie will continue to outperform the S&P 500 going forward, I have a bullish view on a lot of UK shares right now. With that in mind, here’s a look at two British stocks I’d buy today.

A FTSE 100 company with long-term growth potential

First up is FTSE 100 company Prudential (LSE: PRU). It’s a leading insurance company that’s now focused predominantly on Asian and African markets. This stock looks quite cheap at the moment. Currently, it has a forward-looking P/E ratio of just 14.

Prudential’s pivot towards Asia and Africa appears to be paying off. For the first half of 2021, for example, adjusted operating profit from continuing operations jumped 19% at constant currency to $1,571m.

Looking ahead, I see considerable growth potential here. Asia and Africa are untapped markets when it comes to savings and insurance solutions. Prudential believes that if it can execute its strategy successfully, it can achieve long-term double-digit growth in embedded value per share.

One issue that investors should be aware of with Prudential is that CEO Mike Wells recently announced his retirement. Wells has been instrumental in pivoting the company towards higher-growth markets, so his retirement adds a bit of uncertainty. This doesn’t concern me too much, however, as I’d expect the board to find a suitable replacement.

It’s worth pointing out that a number of brokers are quite bullish on PRU right now. Recently, Goldman Sachs initiated coverage of the stock with a ‘buy’ rating and target price of 1,761p. Meanwhile, Jefferies recently raised its target price to 1,800p from 1,750p. This reinforces my view that there’s a lot of investment appeal here at present.

A FTSE 250 star at the heart of a powerful trend 

Another UK stock I like the look of right now is Softcat (LSE: SCT), which is a member of the FTSE 250 index. It provides IT solutions to businesses and public sector organisations across the UK. This stock has had a significant pullback recently and now offers more value than it did in the past.

SCT lies at the heart of one of the most dominant trends on the planet today and that’s digital transformation. All over the UK, businesses and government organisations are scrambling to get up-to-speed digitally. They’re moving their operations to the cloud, they’re investing in cybersecurity software, and they’re seeking out data analytics solutions. This is benefiting Softcat, which can provide all of these things for customers, and much more.

A look at Softcat’s financials reveals that this is a high-quality company. Not only has the group generated strong revenue growth over the last five years (72%), but it has also generated high returns on capital employed. Additionally, it has raised its dividend significantly over the period. Overall, the financials here are very impressive, to my mind.

The valuation here does add a little bit of risk. At present, SCT has a forward-looking P/E ratio of about 32. This doesn’t leave a huge margin of safety. If growth slows down, the stock could underperform.

I’d be comfortable buying the stock at that valuation, however. To my mind, this growth stock deserves a premium valuation.

Edward Sheldon owns shares in Prudential and Softcat. The Motley Fool UK has recommended Prudential and Softcat. 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.

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