Investing in penny stocks can be a great way to grow my portfolio. Admittedly, generally defined as stocks with a share price less than £1, these companies may also have greater risk attached to them. But I’ve researched three exciting penny stocks on the market today that I think warrant an investment next month. Why am I attracted to these three firms? Let’s take a closer look.
Penny stock #1: Centrica
Centrica (LSE:CNA) is an energy and utilities solutions provider. It owns a number of instantly recognisable brands, including British Gas. It currently trades at 89p.
The company has rebounded strongly from the difficulties that came with the pandemic in 2020.
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In 2021, pre-tax profit grew to £767m. This was an increase from a pre-tax loss of £577m the previous year.
In addition, for the four months to 30 April, the business reported rising volumes in its gas and nuclear segments.
This positive momentum led the company to announce that full-year profit and earnings per share (EPS) were expected to be at the top end of previous forecasts.
Investment bank RBC responded positively to this news, raising its price target from 90p to 125p.
However, there are risks that inflation and rising commodity prices will eat into future profit margins.
Penny stock #2: Rolls-Royce
Rolls-Royce (LSE:RR) is a FTSE 100 engine and power systems manufacturer. It currently trades at 84p.
This month, the firm announced that civil aircraft flying hours were up 42%.
This was good news, given that Rolls-Royce is paid by the flying hour by airlines using its engines.
It’s very likely this figure will increase further over the summer. Both International Consolidated Airlines Group and easyJet have been recruiting at pace in anticipation of strong travel demand in the coming months.
There’s also a backlog in Rolls-Royce’s defence contracts, meaning that revenue should be consistent over the long term.
This is bolstered by lucrative contracts, including the $2.6bn deal with the US Air Force to service B-52 aircraft.
However, there’s always the risk that the company’s operations are halted in the event of another pandemic variant.
Penny stock #3: Lookers
Lookers (LSE:LOOK) is a retailer of new and used cars, and also provides automobile aftercare solutions. It’s trading at 70p.
The firm’s profits increased massively between 2020 and 2021, rising from £1.5m to £90m. Meanwhile, revenue grew slightly from £3.7bn to £4bn.
Additionally, EPS rose from 14.57p to 20.07p between 2017 and 2021. By my calculations, this results in a compound annual EPS growth rate of 6.6%. This is both strong and consistent.
It also had net funds of £3m at the end of 2021, swinging from net debt of £40.7m the previous year. This places the company in a stronger position going forward.
It should be noted, however, that there’s a supply chain risk from the global shortage of semiconductors that are used in cars. This could negatively affect the share price of this penny stock.
Overall, each of these penny stocks could be an exciting opportunity for long-term growth. I already own Rolls-Royce shares, so I will add to my current holding. Meanwhile, I will buy shares in Centrica and Lookers next month.
