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How I’d aim to beat inflation by investing £500 in these three penny stocks

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Image source: Getty Images

Penny stocks are a wildcard investment. Nascent companies offer potentially life-changing returns — imagine investing in Apple in the 1980s! Or they could fizzle out before germinating into a money tree.

As such, they should not encompass a large chunk of a portfolio but, when invested in moderation, the upside can overrule natural caution. This is particularly true as savings accounts offer so little protection against inflation. After all, lack of growth eats into savings by the day.

In such conditions, carefully selected penny stocks may be just what I need to stay ahead of inflation in the long term. Here are three of the hottest penny stock prospects in my opinion.

The passive income stream

ARC Document Solutions (NYSE: ARC) offers an array of document services: printing, management of data, and provision of devices to undertake this function.

What caught my eye was its generous 7.12% dividend yield.  This is consistently paid out in spite of swings in its share price. This represents a great cash flow at value for money.

Moreover, its currently low share most likely represents the effect of economic slowdown on its business.  If the outlook improves throughout 2023, as most analysts and central bankers believe, the share could recoup much of its pre-downturn price between $3.75-$4. For its passive income and stellar price prospects, ARC is one for me to keep an eye on.

Educated speculation

Given that the Federal Reserve will likely continue raising interest rates until the labour market softens in order to bring down inflation, it may not sound like a great idea at first for me to buy shares in a staffing company like GEE Group (NYSEMKT:JOB).

Nevertheless, currently trading for only 2.6 times earnings, a stat suggestive of being close to minimum value, a likely 2023 labour market cooldown may already be priced into trading.

If a decline in earnings this year isn’t greater than current projections, which are calling for earnings per share to fall from 20 cents to 9 cents, the reporting of ‘less bad’ results could end up providing the shares with an additional boost.

In addition, there’s strong potential for GEE Group to elevate its turnaround, which in recent years has brought it back to consistent profitability. A large cash reserve gives it the ability to make bolt-on acquisitions, or to aggressively buy back shares. Both of which could stimulate share price growth.

The contrarian

Jerash Holdings (NASDAQ:JRSH) is likely an unknown for many investors.  It produces and exports custom, ready-made sportswear from Jordan. Jerash even underlines the manufacturing of most New Balance products.

Consumer sentiment fell badly in 2022 because of skyrocketing inflation among other financial shocks. Amid such poor conditions, Jerash shed over 40% of its market value.

For conservative investors, that might be the end of the conversation. There is certainly weakness in the consumer economy – notably unprecedented credit card debt.

Nevertheless, as I’m a contrarian, JRSH may be an intriguing idea among penny stocks to buy. Improvements in consumer sentiment could sharply raise the price. A value analysis, the system Warren Buffett made famous, suggests that the only way is up. Jerash shares are priced at 0.35-times sales. Conversely, the underlying industry median is 0.83 times.  This is suggestive of reactionary undervaluing.

Notably, for the one analyst (Mark Argento) who publicly covers Jerash, it enjoys a moderate buy rating. The price target stands at $8, representing upside potential of 104.6% at time of writing. Also, Jerash beat earnings-per-share targets on several occasions in the past two years.  For these reasons, Jerash is very much on my radar as a potential buy.

The post How I’d aim to beat inflation by investing £500 in these three penny stocks appeared first on The Motley Fool UK.

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Tom Hennessy has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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.

Motley Fool UK 2023