Penny stocks: 3 UK shares I’d buy now

These penny stocks have all reported improved performance recently. Roland Head explains why he thinks they still have more to ofer.

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I’ve been hunting for unloved penny stocks with the potential to deliver impressive gains. As the economy continues to return to normal, I think these three companies I’m looking at today could perform well.

Back on track

Smiths News (LSE: SNWS) is the UK’s largest newspaper and magazine wholesaler. The firm supplies around 55% of the market, including many airports and railway stations.

Covid-19 hit retail sales last year. But the company’s financial situation remained stable, with underlying operating profit down by just 5% to £18.9m. Smiths also took another big step forward with the sale of the loss-making Tuffnells courier business.

Having steadied the ship, management feels confident they’ll be able to restart dividend payments this year. Analysts’ forecasts suggest a payout of 1.6p per share, giving this penny stock a useful 3.9% yield.

Smiths News’ shares currently trade on just five times forecast earnings. I think they deserve a higher valuation, but there’s a risk here — sales of printed newspapers and magazines are in decline. I don’t see this changing, so the business could face additional challenges over the coming years.

Despite this, I’d be happy to buy Smiths News today. I’d aim to hold the stock until it reaches a more normal valuation.

Household favourites

Sales of bread, cakes and other baked goods from supermarkets soared in 2020. One of the UK’s largest suppliers of these products is penny stock Finsbury Food (LSE: FIF).

Although the company suffered from the closure of the hospitality trade, pre-tax profit for 2020 was only about 5% lower than during the 2019 financial year.

Trading has continued to strengthen as the UK has started to reopen. In an update at the end of May, Finsbury said pre-tax profit for the year ending 26 June is now expected to be around 10% higher than in 2019.

My main concern is that this business is always likely to face pressure on prices from its big supermarket customers. However, Finsbury’s improving performance and strong market share suggest to me the company is hitting the right notes with customers.

Finsbury shares are trading on just 11 times forecast earnings and management plan to resume dividends this year. I think the shares still have plenty of room to grow and I’d be happy to buy at this level.

This penny stock is performing well online

Car dealership groups like Pendragon (LSE: PDG) were forced to close their showrooms during lockdown, with only service departments remaining open for essential repairs.

Happily, it seems that many of us are now happy to buy cars online. During the first three months of 2021 — when the UK was in lockdown — Pendragon delivered 40,000 vehicles. That’s only 11% fewer than during the same period in 2020, when showrooms were open for all but one week.

Profits are improving too, thanks to a restructuring programme. Pendragon is expected to report an adjusted pre-tax profit of £29m for 2021, up from just £8.2m in 2020.

I can see two main risk today. Firstly, the global semiconductor chip shortage could disrupt the supply of new cars. Secondly, I think there’s a risk the UK economy could slump when Covid support measures are withdrawn.

Despite these concerns, Pendragon shares look affordable to me on 10 times forecasts earnings. I’d consider buying at this level, as I’m impressed by the company’s turnaround progress.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.

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