2 penny stocks to buy and hold for the next five years

Investing in penny stocks can be fun and exciting. The small size of these companies may fly under the radar of big-city investors. In my experience, it is sometimes possible to pick up hidden bargains that just won’t be there FTSE 100 or the FTSE 250.

Of course, the flipside of this also applies. Smaller companies may be less established and more likely to experience financial difficulties.

The two companies I’m looking at are still small, but they have good profits and financials, in my opinion. I think both could be good investments for the next three to five years. This is why.

value for money, quality business?

Car sales group Vertu Motors Kab (LSE: VTU) has 188 franchised dealers in the UK, with a focus on premium brands such as BMW, Jaguar Land Rover and MINI.

Admittedly, the UK car market is expected to be slow this year. But recent trading has been strong and I think Vertu’s price-to-earnings (P/E) ratio of six has reflected a cautious outlook.

Another attraction for me is that the group has free rights to many dealers. This means there is a lot of asset-backing for the share price. If a business is in trouble, freehold property can usually be used to raise cash.

Vertu’s latest accounts show tangible assets of 71p per share, compared with a share price of 56p. The recent acquisition of dealer group Helston Garages means the figures will change slightly, but I think the balance sheet should still be very strong.

Can it go wrong? This business has a good market share and I think it is well managed. But if the UK falls into a severe recession, profits could fall further than expected. If that happens, the stock could drop again and the dividend could be cut.

But, as it stands now, I think the Vertu looks great. I think these penny stocks can do well in an economic recovery.

Sending good news

The second option is a distribution group Smiths News (LSE: SNWS). The company has an overnight delivery network that it uses to deliver newspapers and magazines to retailers.

There is an obvious risk with this business – the circulation of printed newspapers and magazines continues to decline. However, according to Smiths, the decline is quite stable and predictable. Until now, the company has been able to adjust its network every year to be profitable with lower volumes.

The long-term uncertainty inherent in this business is reflected in its lowest valuation. Smiths News is currently trading at just five times forecast earnings, with a dividend yield of 7%.

The risk is that at some point, people will probably have to find a new use for the overnight group network. Otherwise, it can become unsustainable.

Despite this, the next few years seem quite safe. Smiths has secured a long-term contract for 46% of newspaper and magazine revenue. The new deal with Telegraph Media Group runs until 2029, for example.

If the dividend is held, then the 7% yield will provide a return of 35% in five years, even if the shares do not move.

I would not bet the farm on this stock, but I probably offer a good opportunity at the current level.