Penny shares can offer investors like me some higher-risk, potentially-higher-reward investment opportunities. They are often smaller or younger companies. This has both advantages and disadvantages.
As legendary investor Peter Lynch mentions in the best-selling book One Up On Wall Street, “big companies have small moves, small companies have big moves”. Of course, this works two ways and penny shares can have greater downside risks than more established companies.
I own a number of shares in my Stocks and Shares ISA. It is a broad mixture of diversified funds and single stocks. The individual shares include large-cap, mid-cap and small-cap companies. And some of the small-cap companies could be described as penny shares.
I mention this because I like to spread my risk across several types of company. I wouldn’t just own penny shares. If I did, my portfolio would likely be too volatile and it wouldn’t suit my risk appetite.
Penny shares I’d buy
One company that is at the top of my list right now is Sylvania Platinum (LSE: SLP). It meets many of the criteria that I want for when looking for the best shares. It’s highly profitable, has plenty of cash and even offers a relatively generous dividend of 4%.
The share price is up by over 60% in the past 12 months, but it has been up by a lot more. It fell by 30% over the past few months from its peak. I reckon this fall might present me with a buying opportunity.
A word of warning, however. One of the main reasons for the recent decline is due to a fall in metal prices. Sylvania is a producer of platinum, palladium and rhodium. Despite short-term volatility, these metals have favourable long-term outlooks. They are also linked to car manufacturing that has faced disruption due to chip shortages.
My view is that car manufacturing will resume to more normalised levels and the price of these metals will climb higher. In turn, this should be favourable for Sylvania Platinum’s share price.
Strong signals
Another penny share I recently came across is antenna business Mti Wireless Edge. It’s an Israel-based AIM-listed company with a market capitalisation of just over £60m.
It recently reported strong results with growing revenue, profits and cash flow. It’s pleasing to see a steady increase in returns over the past five years. I like to see such consistent growth. The company seems to be making good progress, winning and retaining contracts.
I also like that it has a strong balance sheet with net cash. That said, tiny companies like this can be illiquid and more volatile. I would only consider these penny shares as a small part of my portfolio.
Too cheap to ignore
Lastly, I’d consider finnCap. This small-cap investment brokerage looks cheap to me. It trades at a price-to-earnings ratio of just 6.7x. I reckon it’s undervalued as recent profits jumped on the back of strong equity market conditions. There have been many mergers and acquisitions this year, leading finnCap to declare its “best-ever financial results”. I’d be wary of its relatively poor liquidity, but nonetheless, I’d consider a small position for my ISA.