2 penny shares that I think have great potential

Jonathan Smith notes that both Capita and Premier Foods are technically penny shares, but sees strong potential in both for this year and beyond.

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A lot of people pre-judge penny shares. I used to be in this camp too, having heard about several penny share horror stories. They conjure up visions of the Wolf of Wall Street and untrustworthy stockbrokers. Technically, a penny share is any stock with a value of less than a pound. But using this metric, even Lloyds Banking Group is a penny share. So with that stigma out of the way, here are two ideas that I think could double my money.

A penny share in name only

Capita (LSE:CPI) is a UK-based business that operates in a variety of areas. The bulk of the business comes from public sector work, servicing outsourced projects that need professional services. These can range from payroll and financial details, to broader based consultancy work. It also works with the private sector in the same fields.

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Capita is a penny share, with a price around 47p. The share price has fallen over the past few years, and last traded above £1 before the pandemic hit last year. This shows to me that there’s potential for the share price to double, given that it’s been there only a relatively short time ago. 

I think the outlook for the stock is positive. Over the past couple of years, the business has been trying to simplify operations and focus on profitable areas. Covid-19 has impacted the business, but half-year revenue was only down 9%, showing me that the company is resilient. It also boosted adjusted free cash flow during the period to £176m from £30.1m in 2019.

The risk with Capita is that even if private sector work recovers, public sector projects may be thin on the ground due to fiscal cuts. So the company may need to tilt more to bidding for private sector work to compensate.

A nod to lockdown cooking

Premier Foods (LSE:PFD) just sneaks in as a penny share as it’s trading at 99p as I write. The British food manufacturer owns many well known brands including Mr. Kipling, OXO and Angel Delight. The share price is up almost 350% over a one-year period, but I think it could still climb further. 

A lot of the boost over the past year has been due to larger consumer demand for products due to restaurant closures. For example Lloyd Grossman sauces are an easy addition (as I well know) to home cooking during lockdown. I think that this demand should continue even as we move out of lockdown.

I think people are more cost conscious given the hit a lot have had to their income. So even with restaurants back open, I still believe home cooking levels will be higher than pre-lockdown. In a recent study Premier Foods carried out, it revealed that “91% of Brits intend to cook as much, or more, over the year ahead”.

Some think that having already delivered impressive returns, the share price may be vulnerable to a share price correction. I acknowledge this as a potential risk, but I don’t see it as enough of a plausible argument to worry me about the longer-term growth story.

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