Image source: Getty Images
I recently came across a penny stock that ticks every box for me. It might even be in that ‘hold for 10 years category’ that I’m looking for.
I’d like to outline exactly what it is about this 29p stock that has got me so excited. But first, let me explain why I’m a big fan of some exposure to penny stocks in my portfolio.
Advantages
The attraction of penny stocks for me is that because the companies are still small — typically a £50-100m market cap — they have the potential to explode in size.
US energy drinks company Monster Beverage Corporation is a notable example (if not a typical one). The company sold its snazzy pink and blue cans of caffeine-fuelled drinks for decades while it traded as a penny stock.
In 2005, the share price of $0.09 snowballed to over $100 where it still stands. Investors who saw the potential early on in these energy drinks netted 1,000 times returns.
While such returns are extremely rare, I feel the possibility means it’s worth it for me to keep an ear to the ground. And one penny stock in particular has caught my eye recently.
Hold for 10 years?
The stock I’m talking about is UK delivery firm DX Group (LSE: DX). The company specialises in the collection and delivery of irregular dimensions and weight (IDW) packages and parcels.
Let’s say a company needs to ship a pair of skis to a customer. That’s an awkward size and shape for a package, but a DX van will happily collect and make the delivery.
The stock has a current market cap of £172m and trades at under 29p, a share price that’s down 77.8% from all-time highs. That puts the price-to-earnings ratio at just 13 as well.
In the latest tradings update, the financials were impressive. The revenue, profit and EPS (earnings per share) figures all rose and to me, indicated a potentially undervalued share price.
| Revenue | Profit | EPS | |
| 2020 | £329.3m | £3.0m | 0.1p |
| 2021 | £382.1m | £15.1m | 2.0p |
| 2022 | £428.2m | £22.1m | 2.9p |
These results were underpinned by an improvement in profit margin, with the operating profit margin improving from 4.3% to 5.8% in the last year. The firm’s target in years to come is an even healthier 7.5%-10%. A resumption of dividends in 2023 points to a brighter future as well.
I’m seeing good news all around here, to be honest. Although I do have one reason to temper my bullishness.
Key risk
As much as I like a careful investment in the right penny stock, and recent volatility has left many of them looking temptingly undervalued, I’m quite aware that these are high-risk investments. Penny stocks are more likely to see downswings or even bankruptcies than larger companies.
How would I limit risk? I like a diversified portfolio of carefully chosen companies, with no more than 10% in small-cap or penny stocks. That said, if I had some spare cash right now I’d be looking to open a position in DX Group.
