Many stock market investors are looking for ‘baggers’ — stocks that can deliver gains of 100% or more. Many of these future winners start out as penny stocks, with share prices under 100p.
A word of warning — not all penny stocks are cheap. Some deserve their low ratings, and some will fail altogether.
Even so, I reckon I’ve found three small-cap penny stocks which offer good value, reliable profits, and the potential for big gains. Should I buy them for my stocks and shares ISA?
Safer than houses?
All the recent reports I’ve seen from UK housebuilders suggest demand for new housing remains strong. One of my chosen plays in this area is AIM-listed firm Brickability Group (LSE: BRCK).
Brickability supplies bricks, roofing and plumbing and heating products under a number of brands. The company is run by Alan Simpson, who owns a 16% stake in the business where he’s worked for more than 30 years.
This pedigree suggests to me that Simpson should know how to prepare for the risk of a housing market slump. Brickability’s sales and profits dipped last year, but the company says it’s seeing improving demand for its products. Brokers expect profits to bounce back this year, putting the stock on 12 times forecast earnings.
I see this as a potential long-term growth stock. I’d be happy to buy a few shares in this penny stock and tuck them away.
A 9.5% dividend yield
REITs (Real Estate Investment Trusts) generally offer higher dividend yields, but AEW’s yield is unusually high, at 9.5%.
As a potential buyer, I have two questions. Is the payout safe, and will it grow? Personally, I don’t expect the firm’s current payout of 8p per share to grow for the foreseeable future. My analysis of AEW’s latest accounts suggest the dividend is still affordable, but only just. Management has warned the economic outlook is uncertain, which could affect rent collection.
During the final three months of 2020, AEW collected 90% of rent due from its tenants. If this figure improves in 2021, I reckon the dividend will probably be safe. But if rent collections worsen, then I’d expect a cut.
I don’t often see a chance to lock in a 9.5% dividend yield. I’d be happy to open a small position here, despite the risk of a cut.
An unloved penny stock
My final pick is Appreciate Group (LSE: APP). This company — previously known as Park Group — sells products such as high street gift vouchers and Christmas saving schemes. It owns the Love2shop and highstreetvouchers.com brands, among others.
The Appreciate share price is down by about 50% on a five-year view. The obvious risk is that the growth of online retail will make gift vouchers redundant. Last year was difficult for obvious reasons, with so many stores closed.
However, I think the concept of gift vouchers remains valid online, and recent trading seems to support this. Appreciate reported a 42% increase in billings in December, which was said to be the best month ever.
This penny stock trades on 11 times forecast earnings for 2021/22, with an expected dividend yield of 4.6%. I’m tempted to buy at this level.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.