Investing in penny stocks can be a great way for me to find growth for my long-term portfolio. While they sometimes carry more risk, the rewards can be great. Penny stocks are generally defined as companies with a share price under £1. I think I’ve found three such companies that could be great additions to my portfolio. Why am I attracted to these stocks in particular? Let’s take a closer look.
#1: Pendragon
The first company is Pendragon (LSE:PDG), an online new and used car retailer. It currently trades at 24.9p.
Between 2020 and 2021, this business swung from a loss before tax of £25.5m to a profit before tax of £78.6m.
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This is encouraging and suggests that it has rebounded strongly from a tough time during the pandemic.
What’s more, revenue grew from £2.7bn to £3.4bn over the same period.
Investment bank Berenberg increased its price target in March from 30p to 36p. This was chiefly because the 2021 results were slightly ahead of guidance.
Despite this, there are potential future supply chain problems as the company emerges from the pandemic.
#2: Costain
Secondly, Costain (LSE:COST) is in prime penny stock territory. It’s currently trading at 42p and is a construction business.
Between 2020 and 2021, this company narrowed its losses significantly. These shrank from £96.1m to just £13.3m.
In addition, revenue increased from £978m to £1.1bn. Furthermore, operating margins improved to -0.8% in 2021, up from -9.4% the previous year.
It should be noted, however, that past performance is not necessarily indicative of future performance.
With an order book of £3.4bn, the firm could be in great shape moving forward.
There are risks, however, with inflation and rising commodity costs potentially eating into future profit margins and impacting balance sheets.
#3: Pan African Resources
Finally, I’m looking closely at Pan African Resources (LSE:PAF), a gold-mining business operating in South Africa.
For the year ended June, between 2017 and 2021, profit before tax increased from £44.9m to £104m. In addition, revenue more than doubled from £125m to £368m over the same period.
Recently, the Sudanese government granted the company five exploration licenses. These cover an area of 1,100 square kilometres.
For the six months to 31 December, the company reported record gold production of 108,000 ounces and initiated a one-month share buyback scheme in April, worth £2.6m.
There’s always the possibility, however, that any future pandemic variant could halt production at the firm’s gold mines.
Overall, these three penny stocks could provide excellent growth opportunities. While there are risks associated with each company, I think their respective historical financial results are strong. What’s more, future operating environments for each firm look attractive over the long term. I will be buying shares in the companies soon.
