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It is a coin collection that I will soon add to my holdings. Pendragon (LSE:PDG) fits my investment strategy of looking for small-cap stocks that will help grow my holdings over the long term. Here’s why I love the shares.
Pendragon is the second largest car retailer in the UK. It operates over 150 sites in the UK, representing over 20 different vehicle manufacturers. Some of these manufacturers are included as household names BMW, Mercedes Benz, Ferrari, Nissanand many others.
Pendragon shares currently trade at 22p, putting them in penny stock territory. This time last year, the stock was trading for 19p, a return of 15% over a 12-month period.
Risks to remember
Even if I am interested in buying Pendragon shares, I should be aware of the risks associated with them. The first issue is that there is a huge shortage of new cars for sale. This is a direct result of the shortage of semiconductors, which are important components for new cars, especially electric vehicles (EVs). This lack of new cars could hamper Pendragon’s performance and returns. Due to this issue, we should note that the used car market is currently booming, which may reduce this particular risk somewhat.
The next issue to keep in mind is macroeconomic headwinds. Rising inflation, rising material costs and supply chain constraints could hamper Pendragon. For example, cost increases and supply chain issues can affect profit margins and day-to-day operations.
Why would I buy this penny stock?
So let’s look at the positive aspects of Pendragon. I believe the shares are currently very good value for money at a price-to-earnings ratio of four.
In addition, Pendragon has a good track record of performance, although I recognize that past performance is no guarantee of future performance. In retrospect, his recent performance suggests that the pandemic-related issues may be a thing of the past. Revenue and profit in 2020 were lower due to the impact of Covid-19, but next year it managed to grow revenue and profit to pre-pandemic levels. I expect performance to return to 2019 levels soon.
Ultimately, I like Pendragon’s unique business model as well as its brand name and profile. With multiple brands selling used, new, budget and premium vehicles, it can generate revenue across multiple channels and geographies. In addition, it has a separate parts business, as well as a company that focuses on automotive software solutions for the industry.
In conclusion, I believe Pendragon is a penny stock that is being pressured by the current headwinds and volatility. With its diverse business model and presence, I believe it can be a great addition to my portfolio to deliver long-term growth and returns. This is why I plan to buy Pendragon shares soon.