UK shares purchased for less than a pound a pop can sometimes generate fantastic returns. However, due to their greater volatility, it’s more important than ever to be selective about what I choose to invest in.
With this in mind, here are what I believe to be three of the best penny stocks to buy now.
Growth-focused penny stock
Trading at just under a pound, as I type, is Record (LSE: REC). This is a business that tries to reduce the impact of currency movements on institutional clients’ investment portfolios.
Unfortunately, Record’s recent move to invest for growth has been at the expense of a “short-term decrease in profitability.” However, the firm is still cash-generative and boasts a healthy balance sheet. The payment of a special dividend smacks of confidence too.
Speaking of which, Record started its new financial year in April with its highest recorded Assets Under Management Equivalents (AUME). It’s also been developing new products, including the recently-launched Emerging Market Sustainable Finance Fund.
Aside from this, Record also scores well on the quality metrics, such as returns on capital and margins. These are high, relative to the market in general, and go some way to making up for industry risks, such as regulatory hurdles. Nevertheless, the latter still has the potential to knock the share price.
On a P/E of a little less than 20 for FY22, I think Record could be a good stock for me to buy now.
Also featuring in my selection of the best penny stocks to buy now is retailer Topps Tiles (LSE: TPT). Unsurprisingly, this is a company that really suffered at the hands of the pandemic. However, the tide has clearly turned.
Last month’s update said the company’s retail business had “performed well” in Q3, helped by the reopening of stores in April. Topps went on to say it expected to benefit from “high levels of consumer demand” going forward as the home improvement boom continues. A return to sales growth at its Commercial business is also expected.
Of course, hindsight shows that March 2020 was the time to pile in. The shares have multi-bagged since then. However, a P/E of under 15 now still doesn’t feel unreasonable for a debt-free company with an encouraging outlook. That said, its cyclical nature coupled with warnings that Covid-19 could get worse before it gets better makes this a cautious rather than automatic buy.
Ahead of expectations
A final pick is EKF Diagnostics (LSE: EKF). For under a pound a share, I can buy inmto a company that achieved record sales and profits in 2020.
According to May’s AGM statement, this form has carried on into 2021, thanks to “a very meaningful recovery in trading.” EKF’s core business “performed more strongly than expected” in Q1, again thanks to ongoing demand for sample collection devices generated by the pandemic. Indeed, the company now believes that full-year numbers are likely to be “comfortably ahead of already upgraded management expectations.”
Naturally, all this hasn’t gone unnoticed by the market. In the last year, EKF’s stock jumped by 72% in value and now trades on a forecast P/E of 28. Unfortunately, this high valuation could mean the share price falls heavily if the company disappoints.
With a solid growth strategy and balance sheet, however, I’d still buy EKF today.
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Paul Summers 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.