Investing in penny stocks in a ISA is a volatile quest at the best of times. But in recent years, factors such as inflation, high interest rates and geopolitical tensions have combined to make this situation even riskier.

Yet the rewards can still be very lucrative. Just ask investors War paint Londonwhose shares have increased 540% in five years. Or Yu Groupwhich is a gas, electricity and water supplier for small and medium-sized businesses. Its share rose from 81p in 2019 to 1,630p today – a massive gain of 1,913%!

With interest rates falling in the coming months, the small-cap sector could get a boost in 2025. So now could be a good time to consider starting a mini-cap. wallet small caps and penny stocks.

An appropriate allocation

I say “mini” wallet for a reason. Indeed, while there are undoubtedly hidden gems, most penny shares have, by definition, poor prospects. So I wouldn’t make it a big part of my portfolio.

However, assuming my risk tolerance is high, I would consider a 5% small business allocation. This would be enough to shake things up in terms of returns if the strategy worked well, while minimizing the damage to my portfolio if things go wrong.

What stocks would I buy?

I currently have four securities that were penny stocks, defined as having a market capitalization below £100m and a share price below 100p – when I first bought them. They represent approximately 2.3% of my overall portfolio.

Note that there are no incomeless miners or oil explorers here. For me, investing in this type of stock is too much like speculation. Certainly, they have the potential for explosive growth in their stock prices, but I prefer not to take any risks. I could lose 100% of my investment, which is not my idea of ​​fun.

Each of the companies above offers products and services that generate growing revenue. hVIVO, which designs and manages human challenge trials, is already profitable and has started paying dividends.

The other three are not profitable yet, but I expect two of them (Windward and DP Poland) to be profitable in the next 2-3 years. If they do, I expect them to do well in my portfolio. If they fail to achieve profitability, I expect they will do really badly.

Domino’s Pizza

Take for example DP Poland, whose shares I bought at 10p this year. The company holds the franchise rights to the Domino’s Pizza brand in Poland and Croatia.

In the first half, revenue increased 26% year-on-year to £26.4 million, driven by increased orders and increased market share. By 2026, annual turnover is expected to reach £76.8 million, around 72% more than last year’s figure.

The company is still in deficit, which constitutes the main risk here. Rising inflation and the cost of goods sold could also derail the path to profitability.

However, analysts expect positive earnings over the next two years as the company moves toward a capital-light franchise model. In the longer term, DP Poland plans to open hundreds of additional stores in Poland and Croatia (compared to 111 today).

Stupid Takeaway

If I were to build a portfolio of penny stocks in 2025, I would exclude companies with no sales. Instead, I would focus on those that are showing strong revenue growth and are clearly on the path to profitability or are already profitable.