Penny stocks are priced cheap due to the higher risk involved. On the flip side, they also have huge growth potential. With that in mind, one pick I like for my portfolio is Marstons (LSE:MARS). Here’s why.
Reopening benefit
Marston is a pub and bar operator and ale brewer with over 180 years of experience and history behind it. With over 14,000 people working for it and lots more in partnership with it, it is a powerhouse in the leisure sector. Marstons has close to 1,500 locations throughout the country. It also owns and operates six breweries that produce over 60 ales.
The pandemic was a difficult period for the leisure sector but reopening has been welcomed by all. With reopening in full swing, I think Marstons has and will continue to benefit, which is why its shares are on my radar.
A penny stock is one that trades for under £1. As I write, shares in Marstons are trading for 81p per share. A year ago shares were trading for 47p which is an impressive 72% return. Year to date, shares are up 17% from 69p to current levels.
Why I like Marstons
Pent up demand will benefit Marstons and I believe it’s trading levels will return to pre-pandemic levels as time goes on. I can already see evidence of this in its year-end trading update released last month. This update covered the 52 weeks ended 2 October. Restrictions were lifted on 12 April. For the most recent quarter from 25 July to 2 October, Marstons reported better trading than 2019 levels. Trading since restrictions were lifted has been at 94% of 2019 levels. The pandemic disrupted this year’s trading, which saw pubs only open for 54% of the year. I believe the current reopening will mean pre-pandemic performance surpassed in the coming months ahead.
I like the look of Marstons balance sheet and financial position. Based on the update provided last month, net debt was down £97m from the same period last year, which is encouraging. At year-end, Marstons has £90m of headroom against its £280m bank facility. Furthermore, 94% of its borrowings are set up in a way where they are not at risk of changes in interest rates which we know are currently increasing. This tells me that it is managing finances well and positive trading ahead may mean a return for investors.
I like the fact that Marstons has a diversified business model. Not only does it have several hundred different types of pubs across the whole of the country, it has a brewery arm too. This diversification can protect it against tough trading times or when one part of the business experiences a downturn.
Penny stocks have risks
Firstly, Marstons operates in a saturated market and competition amongst pubs and breweries is intense. This competition could affect trading and any investor returns. Finally, the pandemic is not over. As we go into the winter months, if cases were to rise, the government could consider further restrictions meaning Marstons pubs could close once more like before.
Overall, I would buy shares in Marstons right now if I had £500 to invest for my portfolio. I believe it has a good business model with a robust balance sheet and pent up demand will boost financials and offer generous returns.