If chosen well, penny stocks can potentially provide explosive returns. They come with risks, but if I can pick just a few big winners, they could really boost my gains.
Let’s consider a few successful penny stocks of the past decade. Package holiday firm Jet2 and data analytics business YouGov have been phenomenal investments in recent years. Ten years ago, both were penny stocks. If I had invested £500 into each of them a decade ago, I’d currently have a whopping £21,000.
They each achieved a market-busting annual return of 36%. That’s around 2,000% over 10 years. It’s also far above the average for UK shares. For instance, the FTSE All-Share returned just 7% per year over that period. It’s important to note that most shares would not have gained as much as these two former penny stocks. So picking the right stocks is crucial to finding explosive winners.
Top characteristics
What I’d like to do is find a few penny stocks that could achieve similar returns over the coming years. There are several factors that I noticed about Jet2 and YouGov before they made their explosive share price moves. Both shares had relatively low price-to-earnings ratios (less than 10). Also, the businesses steadily grew both sales and profits every year. Finally, both had strong balance sheets with plenty of cash. This feature can often allow a company to survive during a crisis.
Which penny stocks?
So which penny stocks could I invest £500 in now that show similar characteristics? One share that ticks these boxes is broker and adviser Finncap. With a market capitalisation of just £55m, this is a tiny company. But small companies can often have the greatest potential for share price performance. It’s a well-run business that has demonstrated steady growth. It’s also profitable and highly cash-generative. Finncap operates with a strong balance sheet and offers a relatively generous dividend yield of 5%. There’s much to like about it, but bear in mind that it operates in a cyclical industry. Business can slow during downturns. Overall though, it seems to have managed well through ups and downs.
Mining exposure
Another penny stock I’d consider is metals processing company Jubilee Metals (LSE:JLP), formally known as Jubilee Platinum. In addition to ticking all of the boxes mentioned above, it also benefits from a 30%+ profit margin.
When so much focus is given to fast-growing technology shares, it’s easy to forget some sectors like mining. I reckon Jubilee is a good way to add mining exposure to my Stocks and Shares ISA, particularly at a time of rising inflation. But there are other reasons too. For instance, Jubilee should benefit from some mega-trends over the coming years. It’s significantly exposed to copper prices, which I reckon should grind higher for two reasons.
First, the world will need more copper cables. Think cables for electric car charging. Second, rising infrastructure spending in the US should also keep demand high for new roads and bridges. That being said, forecasting metal prices is difficult. An economic downturn could easily send copper prices falling. It’s something I’ll look out for. Overall though, I reckon Jubilee is in a good place for me to buy a small number of shares for my portfolio.
Harshil Patel owns YouGov. 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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