Some investors tend to avoid penny stocks. I think that is a mistake. These smaller businesses can offer some of the market’s best growth opportunities.
That said, they can come with significant risks and challenges as well. Therefore, they might not be suitable for all investors.
Still, I am comfortable with the level of attention and research required to find the market’s best penny stocks. Here are five companies I would buy for my portfolio today.
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Growth opportunities
The first stock on my list is the leading supplier of specialist information management software, Idox. This company has been going through a restructuring during the past two years.
Its efforts are now starting to yield results. Profit before tax increased 45% in the six months to the end of April 2021. Management is currently looking to drive growth with higher-margin products as well as acquisitions.
Another technology business I would buy for my portfolio of penny stocks is Seeing Machines. This Aim-listed provider of advanced computer vision technology reported an 18% increase in revenues for its 2021 financial year.
It has plenty of money to fund further product development with $48m of cash on its balance sheet at the end of June.
I like this company because it has a long runway for growth in front of it. Revenues totalled just $47m last year, but it has $900m of revenue potential in the pipeline. This could signify a “step change” in growth.
One risk both Seeing Machines and Idox face is that of competition. The global IT and software market is incredibly competitive, and these companies are still relatively small fish in a big pond. If larger peers decide to aim for their market share, growth could come sliding to a halt.
High-risk penny stocks
I tend to stay away from speculative penny stocks, but I am excited by the potential of Benchmark and AFC Energy.
In my opinion, aquaculture biotechnology company Benchmark qualifies as a speculative enterprise because it is still losing money. The firm has accrued £145m of losses in its lifetime.
Still, it owns valuable pharmaceutical technology, and earnings are expanding. Revenues increased 12% in the first half of 2021, and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 82%. I would buy the stock for this growth potential.
AFC is developing hydrogen fuel cells, and it has received strong interest from some big clients. Unfortunately, revenue totalled just £150k in the six months ended 30 April 2021. Nonetheless, the group has several large orders in its pipeline and ended April with £62m of cash to help keep the lights on.
These companies may not be suitable for all investors because they are risky propositions. There is no guarantee either will ever be able to make money and become sustainable, self-supporting enterprises.
Oil growth
The final group I would buy for my portfolio of penny stocks is Jadestone Energy. The small-cap oil and gas producer has an impressive track record of purchasing oil assets and developing them to free up more cash and using the funds for additional acquisitions. As it develops this strategy, I am optimistic about future growth.
This approach has worked so far, but if oil prices fall or the firm overstretched itself, Jadestone could start to struggle.
