I’ve been scanning the UK market for penny stocks I think could grow. Here are two I would pick for my portfolio.
Income and growth
Often investors talk about income or growth stocks as if the two are mutually exclusive.
Among penny stocks, one that seeks to combine the best of both worlds is the Income & Growth Trust (LSE: IGV). This actively managed trust invests in a wide array of small and medium businesses in the UK. It aims to increase value over time through capital growth in those shareholdings. But it also targets income.
That sounds ambitious. But its track record impresses me. For example, last year it paid out 14p in dividends, even though it’s a penny stock. But as young businesses pay out dividends unpredictably, IGV’s own distributions aren’t smooth. So, for example, the couple of years before that, the annual payout was 6p. Still that’s a 7.5% yield on the current share price. As an investor with an eye for dividends, I find that highly agreeable.
Growth prospects
Growth also looks promising. The trust managers have a long record in picking companies. As they diversify across companies, they can afford some bad picks. But overall they have had some impressive successes. For example, the current top holding is in Virgin Wines. The holding is valued at approximately £8.0m, but the trust only paid £2.4m.
Investing in growth stage companies can be unpredictable. The company’s picks might not offer growth and indeed may not provide income in future. That is one reason the IGV dividends move around a fair bit.
Recovery story among penny stocks
One penny stock that has already soared lately is Lookers (LSE: LOOK). The car dealership chain is up 277% over the past year.
With that sort of growth, obviously there is a risk that the shares could run out of steam. But there is a reason for the strong performance. Previously, Lookers had been beaten down due to an accounting scandal. As details of a past fraud emerged in piecemeal fashion, the market feared the worst and the shares tanked.
New management, new auditors, a resolution of the accounting scandal, and a focus on recovery have combined to improve sentiment toward the share, which last year touched a low of 16p.
The company repeatedly emphasized last year that its property portfolio alone was worth 85p per share – less than the current share price.
Strong performance
As one of the biggest car dealers in the UK, Lookers is set to benefit from economic recovery. In a trading statement issued today, Lookers said that its first quarter trading performance was stronger than expected. It sold over 44,000 vehicles in the quarter, which I think suggests the company is no longer on the ropes.
There are risks. For example, working from home could lead to less demand for cars. The company’s historical accounting problems may have damaged its reputation, and the rise of electric cars could damage demand.
I like the shares though, and currently have a position in Lookers. I’m hoping they won’t stay penny stocks for too long!