I often find that penny stocks are a great way to gain growth over a long period of time. These are generally defined as stocks with a share price of less than £1 and a relatively small market capitalisation. Let’s take a closer look at why I’m buying these two penny stocks in July.
Strong cash balance, little debt
Centamin (LSE:CEY) shares have been volatile to some degree over the past year. In that time, the share price has fallen 26% and is down 15% in the last three months. At the time of writing, the shares are trading at 79p.
The company – a gold mining firm operating in Africa, Egypt, and Australia – has enjoyed solid revenue growth between 2018 and 2021. This has risen from $603m to $733m.
Furthermore, pre-tax profits have increased from $178m to $224m over the same time period.
The business also appears to be in a strong financial position. In March, the company had a cash balance of $207m. Its debt pile stands at just $634,000, meaning that the firm has the resources to handle debt, while potentially engaging in controlled expansion.
Despite this, production for the first three months of 2022 was down 11%, year on year. Any pandemic resurgence could cause further production falls due to the possibility of staff shortages.
On the other hand, Centamin shares may be cheap. A glance at forward price-to-earnings (P/E) ratios shows that the business has a lower ratio than a major competitor, Barrick Gold.
This indicates that I would be getting a bargain if I added Centamin to my portfolio soon.
Consistent earnings growth
Secondly, penny stock Hochschild (LSE:HOC) could be a good addition to my portfolio. Over the past year, the share price is down 49% and the shares currently trade at 84p.
The company – a silver miner in South America – has recently been suffering as the underlying price of silver continues to fall. Despite this, pre-tax profit between 2020 and 2021 increased from $63m to $137m. Over the same period, revenue grew from $621m to $811m.
Hochschild had a cash balance of $387m in March, while debt stood at $304m. Furthermore, between 2017 and 2021, earnings per share (EPS) rose from ¢8 to ¢14. By my calculation, this means that Hochschild has a compound annual EPS growth rate of 11.8%. This is both strong and consistent.
It should be noted, however, that past performance is not necessarily indicative of future performance.
There does remain, however, the threat that any pandemic resurgence could cause a halt to mining operations if there are worker shortages.
Overall, both of these penny stocks could provide long-term growth despite the higher risk of investing in these types of companies. I will be adding both firms to my portfolio soon.