Investing in small businesses can be a great strategy to earn high returns. Unfortunately, it can also lead to significant losses. As such, this strategy might not be suitable for all investors. However, I’m comfortable with the long-term risks of investing in small businesses and penny stocks. With that in mind, here are five such shares I’d buy for the next five years.
Penny stocks to buy
The first company I’d buy is the recovery play Pendragon. The pandemic has had a significant impact on the car dealer, but it now looks as if the worst is behind the business.
As the economy starts to rebuild over the next few months and years, I think Pendragon could be a significant beneficiary.
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That said, the car industry is incredibly cyclical. So, there’s always going to be the risk that the company could encounter further problems.
Another two recovery plays I would buy for a basket of penny stocks are Hammerson and SIG. The shopping centre owner and distributor of building products may see rising revenues in the economic recovery. The UK construction sector is already booming, which seems to bode well for SIG’s outlook in the next five years.
Once again, these firms are not without their risks. Hammerson came very close to collapse last year as rental income plunged. Meanwhile, SIG has always struggled with low profit margins and the cyclical nature of the construction business. While I would buy these two penny stocks today, they might not be suitable for all investors.
Growth and income
Foxtons and Photo-Me are two penny stocks that could offer growth and income.
While Foxtons has reported losses for the past three years, that’s expected to change in 2021. Analysts believe the business is set to profit from the booming UK housing market. This could help the company restore its dividend, which was eliminated in 2018.
While there’s no guarantee the payout will be reinstated, analysts believe that is if it is, Foxtons’s dividend yield will stand at 0.7%. However, if the housing market suddenly hits the rocks, I think it’s almost certain the business won’t restore the payout. The stock could suddenly fall as a result.
Despite this risk, I would buy the company for my portfolio of penny stocks as a potential long-term income and growth investment.
Photo-Me reported a loss last year, but the company is expected to roar back to health in 2021. Analysts reckon its net profit could hit £37m this year, which is up from -£2.3m in 2020. That is only a projection at this stage, but I think it shows Photo-Me’s potential for the next few years. Analysts also believe the company could return as much as 8.6p in dividends by 2022. If it hits this target, the stock will yield 13.6%.
I think these figures are incredibly optimistic. There’s a strong chance Photo-Me might miss these projections considering the fragile state of the global economy.
Nevertheless, I would buy the company as an income and growth opportunity for my portfolio of penny stocks.
