Many investors avoid penny stocks because they believe they are too risky. I think that is a mistake. Yes, some penny stocks are risky investments, but others are well-run, highly profitable operations. These could have the potential to produce significant returns for investors.
That is why I am always looking for new penny stocks to add to my portfolio. Here are three companies that I would buy today and hold for a decade based on their growth prospects.
Penny stocks to buy and hold
The first company on my list is the automotive retailer Lookers (LSE: LOOK). Over the past year, second-hand vehicle prices have exploded as supply chain issues have reduced the supply of new cars.
This has resulted in bumper profits for Lookers and its peers. According to analysts, the company is on track to report net income of £66m this year. This trend will continue in 2022, analysts believe.
Based on current earnings estimates, the stock is trading at a forward price-to-earnings (P/E) multiple of just 6.4, which looks dirt-cheap.
This income infusion should help the company strengthen its balance sheet and fund further expansion. These are the reasons why I think the corporation could make a great addition to my portfolio of penny stocks for the next decade.
Risks the company could encounter include rising costs and further supply chain challenges. These could hit growth over the next couple of years.
Economic recovery
The UK economy is recovering from the pandemic, and the construction industry is leading the charge. Severfield (LSE: SFR) is my favourite company in the space. The structural steelwork manufacturer will report earnings growth of 22% in the current financial year and 12% in 2023, projections suggest.
Rising earnings and a robust order backlog should put the organisation on a firm footing to expand over the next decade. However, despite this potential, the stock is trading at a relatively undemanding forward P/E multiple of 9.4. The shares are also expected to yield 4.4% in the year ahead as the company returns some of its windfall to investors.
Unfortunately, growth for the next couple of years is not guaranteed. Rising energy prices and commodity price inflation could hit Severfield’s bottom line.
Financial experience
The final corporation I would add to my portfolio of penny stocks is the financial services company Record (LSE: REC).
After around six years of treading water, the enterprise is expected to report big earnings growth this year. After winning a series of new contracts, earnings are expected to increase by nearly 60% in fiscal 2022. Growth of 20% is projected in 2023.
And these rising earnings should provide the company with additional capacity to chase new business in the years ahead. It has a strong balance sheet with no debt, and the stock also supports a dividend yield of 5.3% at the time of writing.
Despite its potential, I am wary of the fact that Record is a relatively small business with a market capitalisation of just £154m. This could put it at a disadvantage to its larger City peers, which may be able to provide clients with a similar service at a lower cost.
