Investing in penny stocks has long been a favourite strategy for investors chasing large profits.
However, this is probably unsuitable for all investors. Penny stocks can be incredibly volatile. These small businesses may also lack the resources available to larger organisations.
Still, as a way to capitalise on the UK economic recovery over the next few years, I think buying these equities may yield results.
Penny stocks to buy
The first company I’d buy is Fulham Shore (LSE: FUL). This business owns the Real Greek and Franco Manca restaurant brands.
Like most hospitality businesses, the pandemic has slammed Fulham’s top line. Sales are running at about 46% of normal levels.
Nevertheless, Fulham is gearing up for the reopening. It has three new restaurants in the works to add to the existing portfolio of 72 properties. When the economy reopens, I think the company could benefit from increased demand from hospitality-seeking consumers. That’s why I’d buy the stock as a recovery play today.
That’s not to say the organisation is without risks. Hospitality businesses face many challenges such as high labour costs, rising ingredient costs and the possibility of yet more lockdowns. All of these could derail Fulham’s recovery. Still, I think it’s one of the best penny stocks to buy.
Diversified investments
Mercia Asset Management (LSE: MERC) is an excellent way to invest in a basket of UK start-up businesses. The group manages around £872m of assets for clients around the world. It invests these funds in both early-stage and established UK companies.
In the six months to the end of September, the group invested £10.9m in 14 portfolio businesses. Mercia also divested The Native Antigen Company for £4.8m, realising a gain of £1.7m.
As penny stocks go, I think this organisation has many advantages. It’s a way for investors to own a diverse basket of UK companies at the click of a button.
Of course, there are lots of risks with the strategy. Investing in early-stage businesses is incredibly risky, and Mercia is a also relatively small firm. If it struggles to achieve good returns for investors, they could pull their funds, damaging its reputation. Looking past these risks, I’d buy this stock for my portfolio today as a way to play the UK economic recovery.
Spending growth
As the economy recovers, I expect consumer spending to rebound as well. I’ve been looking for penny stocks that might benefit from this theme.
As a retailer of cars, bikes and commercial vehicles, Vertu Motors (LSE: VTU) fits this theme. I think the business should benefit if consumer confidence improves and vehicle sales increase. And if vehicle sales don’t increase, the company’s service revenues should provide a stable income stream.
City analysts believe Vertu can earn 5p per share in 2021, putting the stock on a forward P/E of 7.4. However, these these are just estimates. There’s no guarantee the company will hit these projections.
Vertu faces a multitude of risks that could hold back growth. The economic recovery may not turn out to be as strong as expected. This could hit sales growth. New tech upstarts may also grab market share, which would dent profit potential in the medium to long term.
Despite these challenges, I’d buy Vertu as part of a diversified basket of penny stocks today.
