Many investors avoid penny stocks because they believe they are too risky. I think that is a mistake. Yes, some penny stocks are risky investments, but others are well-run, highly profitable operations. These could have the potential to produce significant returns for investors. 

That is why I am always looking for new penny stocks to add to my portfolio. Here are three companies that I would buy today and hold for a decade based on their growth prospects. 

Penny stocks to buy and hold

The first company on my list is the automotive retailer Lookers (LSE: LOOK). Over the past year, second-hand vehicle prices have exploded as supply chain issues have reduced the supply of new cars.

This has resulted in bumper profits for Lookers and its peers. According to analysts, the company is on track to report net income of £66m this year. This trend will continue in 2022, analysts believe. 

Based on current earnings estimates, the stock is trading at a forward price-to-earnings (P/E) multiple of just 6.4, which looks dirt-cheap. 

This income infusion should help the company strengthen its balance sheet and fund further expansion. These are the reasons why I think the corporation could make a great addition to my portfolio of penny stocks for the next decade. 

Risks the company could encounter include rising costs and further supply chain challenges. These could hit growth over the next couple of years. 

Economic recovery

The UK economy is recovering from the pandemic, and the construction industry is leading the charge. Severfield (LSE: SFR) is my favourite company in the space. The structural steelwork manufacturer will report earnings growth of 22% in the current financial year and 12% in 2023, projections suggest. 

Rising earnings and a robust order backlog should put the organisation on a firm footing to expand over the next decade. However, despite this potential, the stock is trading at a relatively undemanding forward P/E multiple of 9.4. The shares are also expected to yield 4.4% in the year ahead as the company returns some of its windfall to investors. 

Unfortunately, growth for the next couple of years is not guaranteed. Rising energy prices and commodity price inflation could hit Severfield’s bottom line. 

Financial experience

The final corporation I would add to my portfolio of penny stocks is the financial services company Record (LSE: REC). 

After around six years of treading water, the enterprise is expected to report big earnings growth this year. After winning a series of new contracts, earnings are expected to increase by nearly 60% in fiscal 2022. Growth of 20% is projected in 2023. 

And these rising earnings should provide the company with additional capacity to chase new business in the years ahead. It has a strong balance sheet with no debt, and the stock also supports a dividend yield of 5.3% at the time of writing. 

Despite its potential, I am wary of the fact that Record is a relatively small business with a market capitalisation of just £154m. This could put it at a disadvantage to its larger City peers, which may be able to provide clients with a similar service at a lower cost. 

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.

The Greggs (LSE: GRG) share price was down in early trading this morning. That’s despite the company issuing a largely encouraging trading statement and confirming a special dividend. Let’s take a closer look at what’s going on.

Ahead of expectations

Notwithstanding “tough trading conditions“, total sales rose almost 52% in the last financial year to £1.23bn. While this growth isn’t completely unexpected considering that many of the firm’s shops were closed for a time in 2020, it also eclipses sales seen in 2019 (£1.168bn).

This is not to say that Greggs isn’t still being impacted by Covid-19. In company-managed sites, like-for-like sales were up just 0.8% in the final three months of 2021, compared to the same period two years ago. They were also down 3.3% for the full year. The emergence of the Omicron variant, supply chain issues, and staffing disruptions were all blamed. 

Nevertheless, it’s clear Greggs still managed to shift an awful lot of mince pies and festive bakes. And having kept costs in check, it announced today that full-year results in March would now be slightly ahead of its previous expectations. 

New boss

In a separate announcement, the food-on-the-go retailer confirmed that CEO Roger Whiteside would be retiring. Current retail and property director, Roisin Currie, will take up the reins in May.

As sad as it is to see Whiteside depart (he helped increase the Greggs share price from below 500p in 2013 to 3,300p yesterday), I see this appointment as a good thing for two reasons. First, it shows some decent succession planning on the part of the board. The last thing a company needs is for investors to get skittish because it hasn’t got someone in mind for the top job.

The fact that the new CEO is an internal candidate is also encouraging. While fresh blood/ideas from an external applicant can sometimes be exactly what a business needs, I really don’t think that’s the case here. 

Not cheap

As good as today’s update is, Greggs did warn that inflationary pressures are likely to “remain elevated” in 2022. This needs to be borne in mind, considering that the stock was trading at almost 29 times forecast earnings before the market opened.

That doesn’t strike me as an absurd valuation, considering the quality of the business. However, it is arguably getting a little frothy for a sausage roll seller. Moreover, Greggs did say the next few months would probably be “challenging“. 

Still, it can be suggested that the FTSE 250 stock’s growth strategy makes up for this. Roughly 150 net new stores are expected to open in 2021. The business also plans to extend its trading hours and push its digital offer.

With a war chest of almost £200m at its disposal, Greggs certainly has the cash to implement this strategy. Actually, it now has more money than it knows what to do with! Today, the £3.4bn-cap announced that £30m-£40m would be returned to shareholders at some point over the next six months. 

Solid hold

Having done so well last year (+86%), it’s inevitable that the Greggs share price will let off steam. The threat of an earlier-than-expected interest rate rise in the US isn’t helping market sentiment either.

Nevertheless, I have no hesitation in sticking with the stock for now. I may even buy more if the sell-off continues.

Paul Summers owns shares in Greggs. 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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Some passive income ideas are more straightforward than others. One of the reasons I like UK dividend shares for passive income is their simplicity. Putting money into a share, I can just sit back, do nothing, and wait, hoping that passive income will start to flow.

British American Tobacco

One of my favourite passive income ideas that I use in my own portfolio is owning shares of British American Tobacco (LSE: BATS). The company behind famous brands such as Lucky Strikes is a cash generation machine. Cigarettes are cheap to make but can be sold at a premium price. That helps explain the £9.8bn of net cash the company generated from its operating activities last year.

BATS has substantial net debt – around £40bn when it last reported. So some of that cash generation is used for interest payments. Even after that, the strong cash flows allow for generous dividends. Last year the company paid out a mammoth £4.7bn to shareholders in the form of dividends. With a 10-year compound annual growth rate of 7% and annual increases for over two decades, the BATS dividend is highly attractive to me.

On top of that, the company’s share price means that currently the yield is around 7.8%. That means that if I put £1,000 into the shares today, that investment alone would hopefully give me £78 of passive income next year.

But dividends are never guaranteed and there are risks to the BATS dividend. For example, mounting regulation could impose additional costs, eating into profit margins. Declining rates of cigarette purchase in key markets could lead to falling revenues.

ExxonMobil

Another of the passive income ideas I use in my portfolio is ExxonMobil (NYSE: XOM). The US-based energy company is an oil and gas giant. While there is a risk that shifting energy demands cuts revenues, personally I reckon oil and gas could remain profitable for decades to come. A growing global population and lack of cost-effective substitutes in many cases should keep oil demand high for a long time.

Exxon has energy expertise that might allow it to benefit from an increase in alternative energy sources too. That could boost revenues and profits, although in the coming years I see it as insignificant compared to the main profit drivers of oil and gas. Last year saw many companies including Exxon cut back heavily on capital expenditure. That could lead to lower oil availability several years down the line. That could help support pricing.

Exxon yields around over 5%. As well as the risk of declining demand and oil price falls, there is an exchange rate risk. As the shares pay out in US dollars, currency shifts could affect how much I earn in passive income from my Exxon position.

Two simple passive income ideas

If I put £5 a day away, after a year I would have over £1,800 saved up. I could split that between BATS and Exxon. At the current yield, that would give me a projected passive income stream of around £120 per year in future. Both companies have a history of dividend growth so my passive income could increase in years to come, although that is not guaranteed.

Christopher Ruane owns shares in British American Tobacco and ExxonMobil Corp. The Motley Fool UK has recommended British American Tobacco. 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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Electric vehicle (EV) stocks had a pretty mixed time throughout 2021. Some soared to all-time highs, while others suffered crippling declines. One EV stock to enter the market was Rivian (NASDAQ: RIVN).

Rivian went public on November 10 with its shares priced at $78. In the seven days after its IPO, the shares skyrocketed to $172. Since then, the share price has calmed down, currently floating around the $92 mark. This still gives Rivian a whopping $83bn market cap. Does it have the potential to surpass that level in 2022? Let’s take a look.

What is Rivian?

As mentioned, Rivian is an EV manufacturer. The company currently offers two models — a pick-up truck and an SUV. These are being built on what’s known as a ‘skateboard’ platform, a type of EV base chassis that houses the majority of the vehicle’s internal components. This is mass-produced and then used as a foundation to build different models, helping save on costs.

This is one factor that gives me encouragement that the high demand for Rivian vehicles can be met in 2022. What’s more, CEO R.J Scaringe announced he believed that Rivian would have the capacity to produce 1m units by 2030. For context, those are the sort of numbers that Tesla currently produces.

At present Rivian has one manufacturing plant located in Illinois that’s equipped for maximum production of 150,000 units annually. If it can reach this sort of capacity by the tail end of this year, it would really put it on the global EV map.

However, as my fellow Fool Rupert Hargreaves pointed out, Rivian had informed the market that it would struggle to meet its initial target of 1,200 vehicles for Q4 2021. This doesn’t fill me with confidence moving into 2022.

Will Rivian stock explode?

The EV market shows no sign of slowing down over the coming years. If Rivian can position itself right, it could be in a position to take huge advantage of this.

However, more fundamentally, there are some issues I have with Rivian and its current share price. Firstly, despite its $83bn market cap, the firm is yet to make a penny. For context, Ford currently has a market cap of $80bn and delivered $127bn in revenue for FY20. This vast overvaluing worries me and makes me think we could see a big drop in the Rivian stock price during 2022.

In addition to this, Rivian has competition that is far ahead of its current capacity. Obviously, Tesla is the standout here. However, other smaller EV firms like NIO and Xpeng have substantially higher capacity and are producing revenues. Yet both are trading under the $50 mark. This again leads me to question Rivian’s current valuation.

The verdict

In my opinion, the stock seems vastly overvalued considering its fundamentals. The company’s momentum has already begun to slow, and I don’t see this changing going into 2022. Therefore, I don’t see Rivian stock exploding in 2022. I think there are much more enticing EV stocks on the market and hence, I won’t be adding Rivian to my portfolio today.

Dylan Hood owns shares of NIO. 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.

In the first week of 2021, the Argo Blockchain (LSE: ARB) share price rocketed over 250%. Naturally, this spurred investor interest and helped push the shares to an all-time high of 282p in mid-February. However, since then the Argo Blockchain share price has tumbled 68%, so it’s currently sitting at 90p. Does this present the perfect opportunity to add this high-growth crypto stock to my portfolio? Let’s take a look.

Speedy expansion

An undeniable positive for the firm is the speed at which it has been able to grow its mining capacity over the past few years. Back in March 2021, Argo announced it was purchasing a new 320-acre plot of Texan land upon which it has started construction of a new 200-megawatt mining facility. This is expected to increase mining capacity tenfold.

In addition to this, the company announced in September 2021 that it was in the process of purchasing 20,000 new Bitcoin mining machines. This tech upgrade is expected to double the current mining capacity and will be delivered and installed at the future Texas facility between Q2 and Q3 2022.

As my fellow Fool Edward Sheldon pointed out, the current Argo Blockchain share price actually seems quite cheap considering its growth rates and profitability. Analysts estimating a 10.8p earnings per share for 2021. Using this metric, Argo currently trades off of a trailing price-to-earnings (P/E) ratio of around nine. This valuation is enticing to me.

Broader concerns

That said, a concern I have always had with Argo is its business plan. The firm’s revenues are directly reliant on the price of Bitcoin. That means that regardless of the huge extensions to mining capacity, if the Bitcoin price slumps, then revenues won’t increase. If this is the case, then Argo could find itself seriously strapped for cash further down the line. This could lead to poor results and a drop in the Argo Blockchain share price in the future.

What’s more, there is no niche to the firm’s business plan. Essentially, Argo is a massively scaled-up set of mining computers. Anyone with enough time and capital could set up a competing business and eat aware market share.

Short-seller Boatman Capital recently took a swing at Argo. It suggested that the company vastly overpaid for its Texas land plot, indicating a correct valuation of $168,000 (as opposed to the $17.5m Argo paid for it). Such issues never look good to prospective investors.

The Verdict

I do like the look of the current Argo Blockchain share price, especially considering its impressive expansion. However, I feel more comfortable waiting to see how this expansion translates into results over the next few months. What’s more, the broader crypto market seems to be in a bad spot at the moment, hence Argo’s profits are likely to take a hit. Therefore, while I’ll be placing Argo Blockchain on my watchlist, I won’t be adding the shares to my portfolio today.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Dylan Hood 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.

Passive income is the dream that got me interested in investing. Who doesn’t want to make money while they sleep? Unfortunately, it’s not as simple as it sounds, but it’s not impossible either. I just need to own something that generates value. This could be a business or a rental property. I don’t have the capital to buy one of those right now. Instead I’m focusing on dividend investing, and aim to build a portfolio with just £25 per week.

Dividend investing

Dividends are a portion of a company’s profits paid to shareholders throughout the course of a year. Some companies only do this once but many will issue them two, three, or even four times a year. It’s important to note that dividends are never guaranteed – they can be stopped, suspended, or reduced by a company’s board.

What I really like about focusing on dividends is that I can take those payments and re-invest them, increasing size of my portfolio over time and growing its potential yield exponentially.

Yields

A dividend yield is the amount paid to shareholders, per share, and is based on the stock price at that given time. So, if a share is worth £100 and the company issues a £1 dividend per share, then the yield is 1%.

The average yield in the UK at time of writing is between 3.5% and 4%. Some companies can pay as high as 10% or even 13%. That’s better than the average stock market return. However, dividend yields are at unprecedented highs right now and the problem with such large yields is that they are often unsustainable. If a company keeps paying its shareholders millions of pounds out of its profits each year, it has less capital to invest in itself.

Balancing the portfolio

I would be lying if I said I wasn’t tempted by some of these higher yields. But if I intend to hold shares for a long time, then I need to be confident that the shares won’t fall drastically in value, and that a dividend will be paid consistently.

Unilever is a good example of the former. This consumer goods conglomerate’s share price has been on a downtrend since reaching its all-time high in 2019 (5,196 p). But, over the course of the share’s lifetime it has usually trended upwards, increasing 51% between 2009 and 2014, then 63% between 2014 and 2019. 

Imperial Brands is an excellent example of the latter. The tobacco company has issued a payment at least twice a year since 2002. Its shares have fallen quite a lot since 2016, but the company has shown excellent consistency. 

Unilever and Imperial Brands currently offer 3.37% and 8.7% yields, respectively, and I think these two companies balance out my risk. Imperial Brands’ dividend is a little high for me to really see as sustainable. But my expectations are set at 4% I won’t be disappointed if that yield drops. 

Passive income expectations

£25 per week doesn’t feel like a lot but it adds up to £1,300 per year. Saving that much over 30 years eventually reaches £39,000. The best part though is that, through dividend investing, I can reasonably expect to add 4% on top of that each year, maybe even more. It won’t make me rich on its own, but it could become a very reasonable supplement to my pension.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

I’m usually positive about the outlook for stocks and shares. However, the timescale for that optimism varies.

Over the years and decades, shares as a class of asset have risen in value. And in the shorter term, bear markets have always so far been followed by bull markets.

I’d be pessimistic in the short term if the markets began to plunge into a bear phase. But my optimism for the longer-term outlook would likely keep me buying stocks and shares. And the often depressed valuations in a downturn could make that buying a lucrative activity.

Long-term potential

We can get some idea of the longer-term potential for UK stocks by looking at the performance of the FTSE 100 index. It started in January 1984 at 1,000 and is around 7,500 today.

That’s the kind of long-term trend I want to target for my portfolio. So, for me, it’s stocks and shares all the way. And if they go on sale in a shorter-term bear market or general economic downturn, all the better — that’s when the stocks of great businesses have keener valuations. And buying then could power even better returns over time. Although positive outcomes are never guaranteed, because all shares carry risks as well as positive potential.

Successful and well-known investors have been operating like that for decades with spectacular long-term outcomes. For example, Warren Buffett, Lord John Lee, Peter Lynch, Nick Train, Terry Smith and many others.

Meanwhile, I’m seeing plenty of positive potential in the markets for 2022. My reading of the situation in 2021 is that many stocks declined, although the main indices didn’t. So that led to what some people labelled a correction by stealth. And it blew the speculative froth from many company valuations.

The autumn saw the arrival of the Omicron variant of coronavirus and fear once again gripped the markets. The situation acted as a brake on many stock prices. However, concerns have eased and it looks likes stocks are gaining traction. My guess is positive sentiment will continue to grow as the year unfolds because of an improving outlook for businesses.

Looking for great compounders

In short, I think it looks like a great time to be shopping for the shares of quality and growing businesses right now. And my search leads me to enterprises that I’d be glad to part-own for the long haul. My plan would be to allow the underlying businesses to compound their earnings as they grow and thrive in the years ahead. And I’d expect share prices to adjust upwards to reflect the progress. However, positive expectations can be thwarted if a business faces any operating challenges in the years ahead. And I could even end up losing money on some stocks.

Nevertheless, I’m keen to embrace the risks in order to expose my portfolio to the potential for gains. And with that in mind, Imperial Brands, Next, Computacenter, GlaxoSmithKline and DS Smith are all at the top of my list.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith, GlaxoSmithKline, and Imperial Brands. 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.

As one of the most successful investors of the past century, Warren Buffett inspires curiosity among many share buyers. They want to learn from his investment techniques and see whether they can emulate his success.

But Buffett is used to managing billions of pounds. Can his techniques work even if one is investing a more modest amount, such as £500? I think they can. Here is how.

Warren Buffett buys shares in public companies

One of Warren Buffett’s favourite investments is putting money to work in the stock market. By buying shares in large listed companies, he hopes to benefit from their asset base and professional management without having to get involved directly.

That is often as easy for me to do as it is for Buffett. Admittedly the percentage impact a commission has on a £500 portfolio may be higher than on a much larger portfolio. But I could buy shares in the sorts of companies Buffett does, such as Coca-Cola or American Express. Indeed, there is a wide array of companies in which I could invest with my £500 whether or not Buffett owns them. To reduce my risk if a company performs poorly, I would diversify my portfolio across multiple companies.

Focussing on value creation

When deciding what shares to buy, Buffett does not pay much attention to stock market fads. Instead he assesses whether he thinks the return he can get from holding a share will reward him well enough, allowing for the risk of holding it.

To do that, he makes some judgements. He considers a company’s business and its long-term durability. He also looks at its competitive advantage. Buffett likes a company with a strong competitive advantage, which he calls a “moat”. That is what enables a business to raise its prices over time and hopefully make profits year after year.

So, when Buffett looks at shares he might buy, he zooms in on how much money he reckons the company may be able to earn in the future. He then compares that to the current price at which the company’s shares trade. That focus on the potential for value creation is something I can also do as a private investor with £500 to put to work in the market.

Taking time and researching

Warren Buffett is a very patient investor. He is willing to sit on funds for years if necessary until an investment opportunity comes along that he regards as sufficiently attractive.

He spends a lot of time reading and learning about companies, even ones he does not buy. That helps him be better prepared when an opportunity arrives which he does like.

If anything, I think these habits of patience and research might actually be even more useful to me with £500 than to Warren Buffett. After all, with the large funds at his disposal, Buffett can afford some serious mistakes. But with just £500 to invest, a few serious mistakes could wipe out my investment funds. Buffett has a much larger scope for error. That is why I take my time, read widely, and carefully research potential shares for my portfolio. Investment is a marathon not a sprint.

Christopher Ruane has no position in any of the shares mentioned. American Express is an advertising partner of The Ascent, a Motley Fool company. 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.