Penny stocks are often priced cheap due to the higher risk involved. Some picks can offer lucrative returns, however. One nearly penny stock I want to review is First Group (LSE:FGP). Should I buy shares for my portfolio?
Transport provider
First Group is one of the UK’s largest transport providers and has a presence in North America too. FGP employs over 30,000 people in the UK and carries 700,000 passengers a day through its bus and rail operations.
As I write, shares in First Group are trading for 101p per share. At this time last year, shares were trading for 61p, which represents a 65% return. A penny stock is one trading for less than £1, hence why I identified FGP as a “nearly” penny stock. It is worth noting the FGP share price only surpassed the £1 mark last week for the first time since the market crash in 2020.
For and against
I have decided to compile a case for and against investing in First Group for my portfolio to help me make a decision.
FOR: When the pandemic struck, people were under instructions to remain at home. As a result, travel levels plunged, affecting operators such as First Group. With reopening in full effect and vaccination levels increasing daily, bus and rail operators are seeing numbers edge closer to pre-pandemic levels. Recently First Group reported 65% of pre-pandemic levels of use for its rail and bus operations. I expect this to continue and eventually surpass pre-pandemic levels in my opinion.
AGAINST: The pandemic did not help First Group’s balance sheet, unfortunately. It had to try and conserve cash, and performance was badly affected due to dropping customer numbers. As I write, it has lots of debt on the balance sheet, which does not fill me with confidence as a potential investor. This is not uncommon in penny stocks.
FOR: First Group’s place in its respective market as well as its place in the UK’s transport infrastructure is definitely a positive. With a large presence throughout the UK and a vital component in the transport infrastructure of many large cities and towns, First Group will continue to be vital towards reopening for individuals and businesses alike. Furthermore, it recently made a commitment towards greener use of vehicles to cut carbon emissions. This will please ethical investors.
AGAINST: Upon reviewing the transport market, I found that profit margins are quite slim, which is putting me off. With slim profit margins, there is a chance I may not see lucrative returns. In addition to this, the transport market is very heavily regulated. This regulation can change and also affect operations and profitability.
Better penny stocks out there
First Group has some good characteristics and current momentum. In the longer term it could offer a good return but I think there are too many challenges and its debt level currently concerns me too much. I believe there are better penny stock options out there for my portfolio, however. On that basis, I would not buy shares just now.
Jabran Khan 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.
This post was originally published on Motley Fool
