A penny stock that has quietly performed well recently is Costain Group (LSE: COST). Let’s take a look at why and if it could be a good addition to my holdings.
Infrastructure
Costain is an infrastructure business that provides engineering and technology solutions to its clients. It is split over two divisions, which are transportation and natural resources. Transportation covers highways, rail and nuclear markets. Natural resources covers water, power, oil and gas markets.
It is worth remembering that a penny stock is one that trades for less than £1. Costain shares have been on a great run in recent months. As I write, they’re trading for 58p. At this point last year, they were trading for 42p, which is a 38% rise over a 12-month period. Although the share price cooled during the summer due to macroeconomic pressures, after interim results in August, it took off once more to current levels.
To buy or not to buy?
Costain has delivered excellent interim results announced in August for the six months ended 30 June 2023. Whilst revenue stayed consistent compared to the same period last year, operating profit and margin both increased. Furthermore, net cash increased substantially and plans for dividend resumption were being discussed. Its order book looks strong and the balance sheet has been solidified in recent months too. Projections indicate a profitable year is on the cards.
A couple of weeks after Costain’s results, it announced an interim dividend of 0.4p per share. This gives it a dividend yield of 0.7%. Any penny stock that can pay a dividend grabs my attention. I’m interested in seeing if it can continue to payout consistently. However, I do understand that dividends are never guaranteed.
Next, Costain shares look cheap to me on a price-to-earnings ratio of just seven.
Looking at some of the risks that could hinder Costain, operating margins are a worry for me. They look very slim. Performance, payout, and investor sentiment could be negatively impacted.
Another issue for me is Costain’s chequered past. Although I do understand past performance is not an indicator of the future, it has experienced contract issues in the past, which have impacted performance, sentiment and returns. I’ll be keeping a close eye on developments.
A penny stock I’d buy
To conclude, there is no doubt to me that Costain shares have been on a great run in recent times, especially when you consider how many other stocks have performed due to market volatility.
For me, a passive income opportunity, albeit a small one, a decent valuation and positive trading are all plus points for Costain. Furthermore, infrastructure spending is heading towards all time highs. This tends to happen during times of economic downturn as it can help stimulate an ailing economy. In turn, this could help boost Costain shares too.
Overall I would be willing to add a small number of Costain shares to my holdings when I next have some cash to spare. I wouldn’t expect Costain shares to double my money overnight but it could be a good addition to my diversified portfolio of stocks.
