One penny stock I am considering for my portfolio right now is Lookers (LSE:LOOK). Here’s why.
Automobile dealer
Lookers is a multi-franchise car dealer group with relationships with over 30 car manufacturers throughout the UK and Ireland. It has roots stretching back to 1908, when it was founded by John Looker, and it has been listed on the London Stock Exchange since the 1970s.
Penny stocks are those trading for less than £1. As I write, Lookers shares are trading for 96p. At this time last year, the shares were trading for 37p, which is a 159% return over a 12-month period.
Despite semiconductor supply issues halting the supply of new cars, as well as supply chain issues, Lookers has performed well. I believe this is because many consumers have turned to buying used and nearly new cars here in the UK. In fact, the used car market is booming. Dealerships like Lookers, who sell new and nearly new cars, have benefitted.
Penny stocks have risks
Lookers’ progress is at the risk of factors out of its control as well as competition. Competition in the automobile sector is intense and there are many players in the market. As well as this, there are now lots of avenues for consumers to buy cars as well, such as private sales.
Next, Lookers could see performance affected by macroeconomic issues. The semiconductor shortage shows no signs of easing. These parts are vital components in new cars. Supply of new cars has been hit massively in the past six months or so. In addition to this, inflation, rising costs, and supply chain issues could also affect Lookers and its progress.
A penny stock I’d buy
Lookers has a unique business model that I quite like. It owns the property its dealerships operate from, giving it a property portfolio that it can leverage into further revenue. So as well as an excellent automobile business, it has a property arm too. I like stocks with diversified interests.
Next, at current levels, Lookers shares look dirt-cheap with a price-to-earnings of just 5! This looks like really good value to me. There is also talk of dividends returning which would make me a passive income.
Lookers has a good track record of performance too. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see revenue between 2017 and 2019 was consistently over £4.7bn. The 2020 levels were slightly lower due to the pandemic.
Coming up to date, a post-close FY trading update released last month made for good reading. Lookers reported trading and performance has returned to pre-pandemic levels. Full details will be available in the coming months. I wouldn’t be surprised to see the Lookers share price surpass the £1 penny stock barrier after these results are released.
Overall, I think Lookers could be a good addition to my holdings. It seems to have a solid, lucrative business model. It is also fighting off new car manufacturing issues and performing well in the currently burgeoning used car market. I am excited for full-year results coming soon. I would buy Lookers shares and hold them for a long time.
Jabran Khan 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.
