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Here’s why I am buying this automotive penny stock for growth and returns!

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One penny stock I will be adding to my holdings soon is Pendragon (LSE:PDG). It fits into my investment strategy of looking for small-cap stocks that could help boost my holdings over the long term. Here’s why I like the shares.

Automotive retailer

Pendragon is the second-largest car retailer in the UK. It operates over 150 sites across the UK, where it represents over 20 different vehicle manufacturers. Some of these manufacturers include household names such as BMW, Mercedes Benz, Ferrari, Nissan, and many more.

Pendragon shares are currently trading for 22p, putting them in penny stock territory. At this time last year, the stock was trading for 19p, which is a 15% return over a 12-month period.

Risks to note

Despite my intention to buy Pendragon shares, I must note credible risks attached to them. The first issue is the fact there is a severe shortage of new cars available to sell. This is a direct result of a shortage of semiconductors, which are essential components to newer cars, especially electric vehicles (EVs). This lack of new cars could hamper performance and returns for Pendragon. I must note that due to this issue, the used car market is booming currently, which could somewhat offset this specific risk.

The next issue I must bear in mind is that of macroeconomic headwinds. Soaring inflation, the rising cost of materials, as well as supply chain constraints could hamper Pendragon. For example, rising costs and supply chain issues could impact profit margins, as well as day-to-day operations.

Why I would buy this penny stock

So let’s look at the positive aspects of Pendragon then. I believe the shares look excellent value for money currently on a price-to-earnings ratio of just four.

In addition to this, Pendragon has a decent track record of performance, although I am conscious that past performance is no guarantee of the future. Looking back, I can see its recent performance indicates that pandemic-related issues could be a thing of the past. Revenue and profit in 2020 were low due to the impact of Covid-19, but the following year, it managed to grow revenue and profit closer to pre-pandemic levels. I would expect performance to return closer to 2019 levels soon.

Lastly, I like Pendragon’s diversified business model as well as its brand power and profile. Through its many brands selling used, new, budget, and premium vehicles, it is able to derive revenue through many channels and geographical locations. Furthermore, it also has a separate parts business, as well as a company that focuses on automotive software solutions for the industry.

To summarise, I believe Pendragon is a penny stock that is being suppressed by current headwinds and volatility. With its diversified business model and presence, I believe it could be a great addition to my portfolio to provide long-term growth and returns. This is why I am planning on buying Pendragon shares imminently.

The post Here’s why I am buying this automotive penny stock for growth and returns! appeared first on The Motley Fool UK.

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Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.