2 penny stocks to buy in March

Investing in penny stocks can be a great way to discover hidden opportunities that are under the radar for most investors.

Although these companies may carry extra risk, many of them are large, established businesses in real life – small by stock market standards.

Today, I want to look at penny stocks that look good to me right now.

A strong turnaround

Construction and engineering group Costain (LSE: COST) specializes in infrastructure projects in sectors such as roads, rail and water. I hope that the long-term nature of this work means that Costain will be less affected by the economic downturn than businesses focused on commercial construction.

That’s not to say Costain doesn’t have his problems. Before the pandemic, the company suffered losses of £90m due to two large contracts gone wrong.

The pandemic then led to other problems, as some construction activities came to a halt. To stay afloat, Costain is forced to raise £100m from shareholders in 2020.

However, the management of the group is now not responsible for the problem and has made changes to prevent it from happening again. Business is looking good now.

Costain’s latest results showed pre-tax profit up 40% in the six months to 30 June. CEO Alex Vaughan said bidding activity remained strong, particularly on road and rail projects.

The order book stood at £2.7bn at the end of June last year and the company said 90% of its earnings for the rest of 2022 had been secured.

City analysts who cover Costain shares have raised their earnings estimates for the company recently. However, the stock is currently trading at a 2023 forecast price-to-earnings (P/E) ratio of just 4.3, which is very low.

The 2022 results are due this month and should include an update on this year’s outlook. If the numbers are in line with expectations, I think the stock will do well. In my view, this could be a good buying opportunity.

An overlooked offer?

The next option also works in the construction sector but is very different. Severfield (LSE: SFR) is one of the UK’s leading producers of structural steel. It is used for large commercial projects such as office blocks, data centers and warehouses, as well as transport and other infrastructure.

He said the order book stood at £464m at the start of November, equivalent to a year’s worth of earnings. The company also said that the pipeline of new opportunities is still there “a consistently high level”.

Group pre-tax profits rose 17% to £12m between March and September last year, compared with the same period a year earlier. The interim dividend increased by 8%, putting the stock on track for a 5.5% dividend yield this year.

I have been following Severfield’s progress for some time and have not encountered any serious problems.

At current levels, the stock is trading at a 2023 forecast P/E ratio of seven times earnings. That seems prudent enough to me. If trading remains stable this year as expected, I think the stock can do well from this level.