When I am researching smaller businesses to buy for my portfolio, I try to concentrate on firms that exhibit a robust competitive advantage. These should be able to better compete in their respective markets.

To put it another way, they should be able to navigate the challenges of the business environment without having to ask shareholders for extra cash. And based on these qualities, two penny stocks are currently attracting my attention as undervalued growth companies. 

Recovery investment

The first company on my list is Hostelworld (LSE: HSW). This is a recovery investment. The business is a leading global online travel agent focused on the hostel market. But as investors might expect, the firm has been struggling over the past couple of years.

However, it is now returning to growth. According to its latest trading update, in October of last year, net booking values across its platforms exceeded 2019 levels. Unfortunately, the impact of the Omicron variant destabilised this recovery.

Nevertheless, last year’s numbers show that consumers are waiting to return, which could bode well for the enterprise in 2022. 

There are plenty of challenges on the horizon. The pandemic is not over just yet. New variants and disruptions could hit the company’s recovery. The cost of living crisis may also impact the demand for holidays, and Hostelworld will almost most certainly feel the impact of this. 

Still, with over €25m of cash on the balance sheet, the company has the resources to weather any uncertainty and capitalise on the global economic recovery. As the corporation looks to consolidate its position in the global hostel booking market, I think it has strong growth potential over the next 10 years. 

Penny stocks for income and growth

Taylor Maritime Investments (LSE: TMIP) is a somewhat unique offering in the world of penny stocks. It is a specialist dry bulk shipping company that owns a portfolio of 31 vessels contracted out to clients across the globe. 

These vessels transport bulk commodities such as iron ore. The shipping industry is one of the main arteries of the global economy and is currently experiencing a boom in demand as countries worldwide try to rebuild from the pandemic. 

This industry is highly cyclical. That is probably the biggest challenge this business faces. It is experiencing favourable tailwinds right now, but if shipping rates suddenly drop through the floor, the enterprise might have to take evasive action. 

Still, the corporation is generating a lot of cash in the meantime. That is why I would buy the shares for my portfolio of penny stocks. Management targets a 7% dividend yield on the company’s issue price of 100p. There is no guarantee it will hit this target, but with the stock trading below this level, it looks attractive as an income investment. 

A top electric car stock

Booming electric vehicle sales opens up a world of opportunity for UK share investors like me. I’m thinking of doing this by acquiring shares in Zinnwald Lithium (LSE: ZINN). The commodity it’s aiming to pull out of the ground is required in huge amounts to drive battery-powered vehicles. Zinnwald is hoping to start producing lithium from its Central European project over a 30-year period from next year.

I also like Zinnwald because its eponymous lithium asset is, as it says itself, “in the heart of the European chemical and automotive industries” in Germany. This puts it on the doorstep of major industrial customers. Even though trouble developing the mine could hit profits projections I think Zinnwald still has enormous long-term investment potential.

Full steam ahead

It’s possible you haven’t heard of Taylor Maritime Investments Limited (LSE: TMIP). This penny stock only began trading in London last May. I’d buy it today because shipping rates are booming and there’s a good chance they’ll continue climbing for some time.

Taylor Maritime owns 32 Handymax and Supramax vessels which transport bulk commodities. And at the moment, the firm is thriving as the global economy recovers from Covid-19 and raw materials demand surges.

Charter rates are currently at their highest for a decade, Taylor Maritime says, and it has tipped “continued market strength for the coming two to three years” too. This is perhaps no surprise given that orders of Handysize vessels (which comprise the Handymax and Supramax categories) are at their lowest for many decades.

The shipper could of course hit choppy waters if the economic rebound runs into trouble. But as things stand today, I think the potential benefits of owning this penny stock far outweigh the risks.

Tough as steel

Strong commodity price inflation because of rocketing demand could threaten earnings at steelmaker Severfield (LSE: SFR). However, a strong outlook for the global construction market suggests this could still be a top penny stock for me to buy. Rebounding building rates following 2020’s Covid-19 shock drove Severfield’s European and UK order books to record highs as of September, most recent financials showed.

I like Severfield because the structural steel it manufactures is used to make buildings, bridges and other types of infrastructure across the globe. This gives it extra strength as it reduces its reliance on one or two sectors or geographies to drive profits. I am particularly encouraged by the firm’s exposure to India where rapid urbanisation will offer terrific revenues opportunities.

One final thing. At current prices below £1, Severfield trades on a forward price-to-earnings (P/E) ratio of 9.5 times. I think it could be a great growth stock that’s too cheap to miss.