Investing in penny stocks can be challenging, especially when looking for companies to buy and hold for the next decade.
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.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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