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Two penny stocks I want to take a closer look at are: Alternative Income REITs (LSE: AIR) and Equity (London: EBQ).
Let's take a deeper look at each investment case to help me decide whether or not I should buy some stocks.
Alternative Income REITs
Set up as a real estate investment trust (REIT), Alternative makes money from income-producing properties. These can range from office space and housing to logistics facilities and more.
One of the biggest attractions of investing in these types of trusts is that they are required to return 90% of profits to shareholders.
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From an optimistic perspective, I am a proponent of Alternative's diversification. I have found that most REITs tend to focus on one type of property, whether it is housing or healthcare space, to give a couple of examples. Alternative has assets in several industries. The good thing here is that diversification mitigates risk.
In addition, the stock offers a massive dividend yield of 8.9%. This is significantly higher than the FTSE 100 Index average of 3.9%. However, I understand that dividends are never guaranteed.
Furthermore, given its net asset value of around 80p per share, the stock is 14% undervalued. The stock is currently trading at 70p.
From a bearish perspective, high interest rates are putting significant pressure on REITs from a revenue collection, growth and net asset value perspective. If these rates come down, earnings and returns could increase. While rates remain high, they present a real risk to shareholder value.
I would be willing to buy some alternative income stocks next time I have free funds.
Equity
Media and marketing analytics consultancy Ebiquity is a bit of an enigma. It’s firmly in the penny stock category and is, on paper, a small company, but there’s plenty of upside when I look at the investment case.
First, the stock appears undervalued by about 70% according to the discounted cash flow (DCF) model.
Plus, the company has a decent performance history to fall back on. It has grown its earnings each year at a rate of just over 6% for the past five years. While that's not a spectacular growth rate, it represents what appears to be a steady ship in the volatile world of penny stocks. I understand that past performance is no guarantee of future performance.
Finally, analysts' forecasts point to significant growth in the coming years. However, I always take analysts' forecasts with a grain of salt, especially in the case of small-cap stocks, as they may not come true.
If we look at the downsides, it's obvious that Ebiquity is a small fish in a big pond. Competition from larger companies in the sector with more muscle to show could present growth challenges in the future. Alternatively, it could be bought out and absorbed by a larger company in the sector. Also, marketing is often one of the first budget cuts when economic volatility hits, as it is now.
Overall, I'm going to keep an eye on Ebiquity stock for now, and I might be tempted to buy some soon as things develop.
