Penny stocks possess greater risks than more established stocks. Some of these picks can provide lucrative returns in the long term, however. I believe Esken (LSE:ESKN) could be a good recovery play for my portfolio. Should I add Esken shares to my holdings at current levels?
Aviation and energy
Esken is a UK infrastructure company. It has two divisions, which are aviation and energy. Its aviation division helps manage airports and run day to day operations. It currently manages London Southend Airport. Other aviation services include baggage, checking-in, and other logistics solutions. The energy division helps provide fuel to biomass plants.
Penny stocks are those that trade for less than £1. As I write, Esken shares are trading for 14p. This means it is one of the cheapest shares on the FTSE index right now. A year ago shares were trading for 21p. The pandemic has affected the share price. Aviation and travel stocks have had a turbulent 18 months due to restrictions and the pandemic.
For and against investing
FOR: Despite the current issues in the aviation industry, I like that Esken’s business has a diversified offering. Aviation may eventually pick up if the pandemic eases but it continues to operate its energy division, which has seen growth recently. I especially like penny stocks that have a diversified offering and don’t rely on one form of revenue stream.
AGAINST: Aviation is the larger division. The well documented issues that the aviation industry has faced since the pandemic started put me off. With the threat of new variants, which could result in more restrictions and less travel, the aviation industry’s woes may continue for a long time. There is a school of thought that living with the pandemic is the new normal and there will be peaks and troughs of travel.
FOR: A half-year report announced in November for the six months ending 31 August showed me signs of recovery for Esken. It reported that revenues increased by close to 8% compared to the same period last year. This was mainly driven by its energy division and its growth. Furthermore, aviation losses had declined less than the same period last year. Esken also managed to make a profit based on an earnings before interest, taxes, depreciation, and amortisation (EBITDA) basis for the half-year period.
AGAINST: Esken shares are still way off pre-pandemic levels which is understandable but still an issue for me. Furthermore, it was reporting consistent losses prior to the pandemic which is usually a red flag. If aviation woes continue and energy cannot pick up the slack, Esken may not report a profit for some time.
Contrarian penny stock option
Every now and then I like to pick a contrarian stock for my portfolio. This is usually a stock that has potential and is currently dirt-cheap so I am not risking lots of my hard-earned cash.
I place Esken in this contrarian bracket. Despite some credible risks and issues, for 14p per share, I would be willing to buy a small amount of shares for my holdings and keep an eye on developments. I see some potential in Esken in the longer term. If this potential doesn’t materialise, I wouldn’t have lost a substantial amount of money buying this penny stock.