I own a selection of penny stocks in my portfolio. While these companies can be riskier investments than larger businesses, they can also generate outsized returns. As such, I think the potential rewards outweigh the risks of investing.
That said, these investments can turn sour very quickly, so I have to keep a close eye on their operations. With that in mind, here are three penny stocks I would buy today for their growth potential.
Cheap penny stocks
The first company on my list is the hospitality operator Marston’s (LSE: MARS). After the challenges of the pandemic, it looks as if the business is bouncing back.
According to its latest trading update, sales during the 16 weeks to 22 January were down just 3.6% compared to 2019 levels. However, before the Omicron variant emerged, like-for-like sales in the eight weeks to 27 November were 1.3% above 2019 levels.
The company is having to deal with some challenges that could hold back this growth recovery. Inflationary pressures could increase costs for the group and customers, hurting sales.
These numbers appear to show that without restrictions, Marston’s has the potential to return to pre-pandemic levels of sales and profits.
Still, despite this potential, the stock is selling around 30% around pre-pandemic levels. I think this presents an opportunity for long-term investors. That is why I would buy the shares for my portfolio of penny stocks today.
Building the recovery
Specialist building products supplier SIG (LSE: SIG) has struggled to earn a profit since 2015. The group has lost more than £400m since 2016.
Thanks to the booming European construction market, analysts believe this will change over the next two years. The City has pencilled in a group net profit of around £10m for the 2021 financial year and £18m for 2022.
Yet it looks as if the market doubts the company’s potential. And I will admit I think there is a strong chance it will miss the projections. After five years of disappointment, the company needs to pull out all of the stops to convince the market it is back in business. Inflationary pressures and the supply chain crisis will not help matters.
Despite these challenges, I would acquire this business for my portfolio of penny stocks as a speculative recovery play. If it can return to the black over the next two years, investors could return to the shares and drive a re-rating of the stock.
Rising interest rates
Metro Bank (LSE: MTRO) only recently entered the realm of penny stocks. The company was once one of the most sought after businesses on the London market. But after a string of scandals and disasters, the shares have plunged.
Nevertheless, I believe the outlook for the banking sector as a whole is improving as interest rates start to rise. Higher interest rates will enable lenders to charge borrowers more, boosting their profit margins.
Metro’s main challenge now is to reduce costs far enough for rising rates to have a material impact on group profit. If costs begin rising faster than interest income, the lender could struggle to return to growth.
Despite this headwind, I think the combination of the economic recovery and rising interest rates provides a very favourable environment to support the business’s comeback in the next few years.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Marstons. 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.
