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Penny stocks: here’s 1 to buy, and 1 to avoid!

British Pennies on a Pound Note

I’ve been looking at penny stocks for my portfolio. Sometimes they can be higher-risk investments that are more volatile than larger companies. But I’d always consider investing in penny stocks — as long as I research the companies concerned — because the return potential can be huge.

Here are two penny stocks I’ve been considering this month.

A penny stock to buy

I’ve been looking at Creightons (LSE: CRL) as a potential buy for my portfolio. It’s a developer and manufacturer of toiletries and fragrances for its own brands and also private labels. It provides outsourced manufacturing for third-parties too.

The share price is 97.5p as I write, so only just in penny stock territory. In fact, as recently as September the share price was around 130p. I view the stock decline as general market weakness, and not about anything specific to the company’s performance.

Even though Creightons is a penny stock today, with a market value of only £68m, the company is showing signs of being a quality operator. For example, it’s able to generate double-digit returns on its capital. It has been able to increase its operating margin almost every year from 2012 when it was as low as 1.6%. In the company’s fiscal year 2021 (the 12 months to 31 March 2021) the operating margin had improved to 8.8%. These are key characteristics I look for before investing in a company.

The growth has also been impressive of late. Revenue grew 29% in Creighton’s most recent year, and profit increased further by 37%. Some of this growth was from sales of hand sanitiser due to the pandemic, so may be considered a one-off. This may mean that revenue growth slows, so it’s a risk to keep in mind.

One further risk to consider is the lack of analysts covering the stock as the company isn’t large enough to warrant professional research. Therefore, I have to be confident in my own forecasts before I invest. 

But on balance, I like the potential here. I’m considering this penny stock for my portfolio.

And one to avoid

I also came across AO World (LSE: AO) as a potential penny stock investment. It’s an electrical products retailer operating across Europe and offering a range of kitchen appliances and home electricals.

Revenue growth has been impressive in recent years, so there might be a good investment case here.

However, the company has only recently become a penny stock as the share price dipped to 95p at the end of November. The price was over 400p at the start of 2021, so something must have gone wrong.

Well, in the most recent half-year results to 30 September, the company said it made an operating loss of £11m. This was down from a profit of £16m in the same period one year ago. The company said it built up its cost base as it expected revenue growth to continue. Multiple issues now mean revenue will be flat or even potentially decline by 5% for the full year.

The company has really suffered due to supply chain constraints and cost inflation recently. I don’t expect these problems to ease for a little while longer. So, as it stands, I won’t be investing in AO World until I see some evidence that these issues are easing. If they do, I’ll revisit the investment case here.

The post Penny stocks: here’s 1 to buy, and 1 to avoid! appeared first on The Motley Fool UK.

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Dan Appleby 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.