As a general rule, the world of penny stocks is best avoided by all but the most risk-tolerant investors. That said, there’s always the potential for investors to dramatically improve their wealth if they pick well. Here are three minnows that continue to catch my eye (one of which I’ve already bought).
Xpediator
First up is freight management and warehouse service provider Xpediator (LSE: XPD). The company operates across the UK and Central and Eastern Europe.
As maybe expected, the pandemic hasn’t made life easy for the business. However, since dropping to 14p last March, shares have rallied almost 250%! A quick look at its most recent update on trading shows why.
Back in January, the small-cap reported that profits in 2020 would likely be “significantly ahead of market expectations” following “higher than anticipated demand” for the company’s diversified services at the tail end of the year. Xpediator now looks set to report adjusted pre-tax profit of £7.2m in April. That’s up 40% on what it achieved in 2019.
Naturally, the AIM-listed company won’t be everyone’s cup of tea. Operating margins tend to be very low in this line of work. Others may be put off by the company’s steadily increasing level of debt.
Even so, I think this momentum could continue in 2021. A forecast price-to-earnings (P/E) of 10 certainly doesn’t look too dear yet.
Lookers
Another penny stock that could prove a great buy in time is car retailer Lookers (LSE: LOOK). This is assuming consumer spending recovers strongly once lockdown restrictions are lifted.
Following a decent recovery in H2, Lookers looks set to report underlying pre-tax profit of £10m for 2020. This compares favourably to the £4.2m achieved in 2019. It’s also better than the “small loss” penciled in by analysts. What’s more, LOOK’s management also expects to reveal a reduction in net debt from £59.5m in 2019 to £45m by the end of last year.
At 52p a pop, shares in Lookers are already up 150% since last July. Notwithstanding this, they’re still far below the 157p they were trading at five years ago.
As things stand, a price-to-earnings (P/E) ratio of 11 looks reasonable value to me. Then again, it’s worth noting that the arrival of the third wave of the coronavirus in the UK could mean analyst projections are quickly thrown out of the window.
Arc Minerals
A final penny stock — and one I own — is copper explorer Arc Minerals (LSE: ARCM). Thanks to the buzz around electric vehicles, mining stocks have garnered a lot more attention recently. ARCM’s share price is up almost 350% in the last 12 months! That said, I think the £66m-cap is still flying under most investors’ radars.
Focused on copper deposits in the western part of the Zambian Copperbelt, Arc has stakes in two subsidiaries, Zamzort and Zaco. The reason it’s come to my attention in recent months is the possibility of a deal with mining giant Anglo American.
Is this nailed on? Definitely not. Moreover, a recent placing by the company — and subsequent reduction in its share price — only serves to highlight how tricky investing in this sector can be, and why no one should invest more than they’re prepared to lose.
So, Arc Minerals is undoubtedly a high-risk play. However, I expect fireworks later in the year if (and that’s a big ‘if’) all goes to plan.
