Penny stocks are often seen as high risk investments that can sometimes yield high reward. In Pendragon (LSE:PDG), I believe I have found one pick that could be a great growth opportunity for my portfolio. Here’s why I like it.
Car market booming
Pendragon is the second-largest motor retailer in the UK. It represents 21 different vehicle manufacturers in the automotive retail sector and operates over 160 sites throughout the UK.
The Covid-19 pandemic has had an effect on many industries and the automotive sector is no different. There is a shortage of new cars (more on that later) but the used car market is booming. Furthermore, climate change discussions and mandates for net zero carbon emissions are becoming more prevalent. This has led people to turn towards purchasing cleaner, more environmentally friendly electric vehicles (EV).
Penny stocks are those that trade for less than £1. As I write, the shares in Pendragon are trading for 21p. At this time last year, shares were trading for 12p, which is a 75% increase. I think shares could rise further too.
Why I like Pendragon
Pendragon has a diversified business model and an international presence, which helps it to generate revenue and profit through different channels. It runs new and used car showrooms with different manufacturers as partners in the UK and in the US. These are usually under its Evans Halshaw and Stratsone brands. Next, it runs a wholesale vehicle parts business under the QuickCo banner. In addition, it owns Pinewood Technologies. This arm of the company provides software solutions to the automotive industry. Finally, it also operates a separate fleet and leasing business through its Pendragon Vehicle Management business.
When looking for the best penny stocks I look at recent and past performance. I understand past performance is not a guarantee of the future but I use it as a gauge nevertheless. I can see revenue recorded was above £4bn for three years before the pandemic-affected year of 2020. Coming up to date, a brief Q4 update announced on 1 December saw Pendragon confirm it had upgraded its profit guidance for the full year to 31 December which shows performance is strong.
At current levels, Pendragon looks like a cheap penny stock option for my portfolio. It sports a price-to-earnings ratio of just six, which is cheap for a large, successful firm with an international presence and a diverse offering.
Penny stocks have greater risks
Pendragon could see performance and growth affected by the current shortage of new vehicles being produced. This is directly linked to a shortage of semiconductors which are essential parts of EVs. Furthermore, macroeconomic pressures such as supply chain issues and HGV driver shortages could affect UK operations and performance in its showrooms.
Overall I believe Pendragon could be a good addition to my portfolio at current levels and I would happily add the shares to my portfolio. It has a good track record and recent performance has been strong too. Shares right now look cheap, which means I could see some lucrative returns in the longer term. As with most penny stocks, I am prepared for some potential pain linked to the risks noted earlier.
Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Pendragon. 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.
