When looking for shares to add to my portfolio, I try to judge their potential value. That not only includes the share price, but how well I think the businesses may perform in future.
So penny shares do not attract my attention just because they cost under a pound – I also consider their long-term business prospects.
With a focus on the long term, here are three shares I have bought for my portfolio I think could increase in coming years.
boohoo
Retailer boohoo (LSE: BOO) has been facing troubles, such as ongoing reputational risk from supply chain conditions at some of its suppliers and inflation eating into profitability. Indications from rivals such as ASOS suggest consumers may be tightening their belts and spending less on fashion.
But I reckon that might actually help boohoo as it operates at the bargain end of the market. Its large new factory in Leicester shows it is addressing supply chain issues in a meaningful way. I reckon the company can raise prices in the next couple of years to offset inflationary pressures without too much damage to its bottom line.
Meanwhile, the company owns a host of popular brands and has a large customer base. It has been consistently profitable in recent years and is set to keep recording double digit percentage increases in revenues. I think the selloff means boohoo shares now trade well below their potential.
Victorian Plumbing
Like boohoo, Victorian Plumbing (LSE: VIC) has seen its share price collapse in the past year. Its share price has fallen by over 80% in 12 months.
Also like boohoo, the company faces headwinds. The same inflationary and supply chain issues could hurt its profitability. Bathroom and DIY sales may fall sharply now many are spending less time at home than during lockdown.
But, as with boohoo, the company is profitable. I think it has established a strong niche in the market. Another plus is that founder and chief executive Mark Radcliffe has spent another £354,000 buying shares this month. That means he now owns 152m of them.
The price-to-earnings ratio of less than six also looks like a bargain to me. I think if it can maintain profitability the share price can partly recover, even if revenues are flat. I also expect the company’s extensive advertising to help increase revenues. And that should help the share price.
Penny share in financial services
It may seem odd that Lloyds (LSE: LLOY), with its £32bn market capitalisation, trades among the penny shares.
But the financial services giant has been a penny stock ever since the aftermath of the financial crisis. Challenges remain. For example, a recession could lead to higher default rates and that would likely hurt profits at Lloyds.
But with its strong brand name, market-leading mortgage book and well-covered 4.4% dividend yield, I see a number of reasons to regard the shares as cheap.
Lloyds trades on a P/E ratio of six, which looks cheap. Rivals NatWest and HSBC trade on a P/E ratio of 10. If the business keeps performing strongly and the shares are valued more in line with its peers, I see potential upside for Lloyds in the short-term. In the years to come, if the economy is strong enough, I think we could potentially see the Lloyds share price soar.