Novice investors often focus on the best penny stocks to buy now. This usually means shares that are trading for less than £1 each. And it’s not always tiny businesses no one has heard of.
There are technically two ‘penny’ stocks in the FTSE 100!
As it happens, both would make my list for the best penny stocks to buy now. Despite a very large debt risk, I think Rolls-Royce remains undervalued. A recent sell-off of foreign liabilities is promising for cost-cutting, too. Lloyds remains a buy for me despite this year’s 30% price rise, because dividends are returning, at an expected 4.4% yield.
But when I’m looking for penny stocks to buy now I usually only consider small companies – those with a market cap of less than £250m. And I think these two have better prospects than multinational giants.
Return of the Mac
Shares in McBride (LSE:MCB) have gained a modest 3.5% since I last tipped them in March. That’s not a great return for tying up capital for four months. Buying any penny stock comes with opportunity risk. By buying one, I have to turn down everything else. But I still see long-term upside in Europe’s leading own-brand cleaning goods supplier. That’s why it makes my best penny stocks to buy now list.
There are concerns: McBride shares crashed more than 25% in a day when it released a surprise profit warning in May. While the share price recovered fairly quickly, profits are expected to be 15% lower this year than in 2020.
I’m also uneasy about the “uneven levels of demand” mentioned in that trading update. And the fact that the “raw material environment remains challenging” because supplies are less readily available. A price-to-earnings ratio of just 6.2 perhaps reflects this uncertainty.
CEO Chris Smith has, however, moved to raise some prices and slash costs to improve margins. And £715m in sales on a £153m market cap still looks decent value to me in the longer run.
A generous serving
Long-term recurring revenues are usually a metric that helps a company make my penny stocks to buy now list. I see a lot of potential in £132m market cap construction and energy services group Sureserve (LSE: SUR).
On 8 July 8 it announced an eight-year, £36m gas servicing and electrical testing contract. That’s with a new client, too. So I can be reasonably confident the business is growing nicely in the medium term.
Half-year interim results to 31 March 2021 showed some interesting statistics. Operating profits were up 54% to £4.8m and earnings per share jumped 71%. Interim chairman Robert Leggett noted how the business shifted from a net debt position of £3.5m to net cash of £9.7m.
“The immediate future remains uncertain due to the pandemic,” Leggett said. And this is a concern for all my penny stocks to buy now. The shares could tank if Covid-19 gets worse and restrictions are reimposed.
Its clients remain largely in the public sector and government funding cuts could mean this source of revenue dries up. According to the National Audit Office, 25 councils in the UK are on the brink of bankruptcy. Half say their finances won’t recover until 2025. So this is an obvious concern.
Still, Leggett said Sureserve’s “substantial order book [provides] good visibility on earnings”. That stronger net cash balance sheet could help it ride out problems in the medium term.
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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.