Finding hidden gems on the stock exchange is my preferred investing strategy. If a company has the potential to grow into a much bigger operation, then the returns for my portfolio can be huge.
Here are three penny stocks that have explosive earnings forecasts for this year.
The road to recovery
The first penny stock is Stagecoach Group (LSE: SGC). It’s a passenger transportation company operating bus routes around the UK. Pre-Covid, the shares traded around the 140p mark, but they crashed heavily in March 2020 and remain in penny stock territory at close to 77p.
But I like the potential recovery play here. In a world where staycations are more popular, Stagecoach’s bus services should be in greater demand. Vehicle mileage has recovered to 94% of 2019 levels, showing the recovery is on track.
Earnings are forecast to grow 54% this year. Next year could be even better, as earnings are expected to grow an explosive 175%.
There are risks to consider though. Any new lockdown would be a significant blow to the company. There are also negotiations ongoing over a potential merger with National Express that could disrupt normal business operations. I would have to get comfortable that this is the best thing for the business before I bought any shares.
But I do like the potential growth here.
Equipment for hire
Another penny stock I like the look of is Speedy Hire (LSE: SDY). It’s an equipment-for-hire company for the construction industry. Ashtead Group that’s listed on the FTSE 100 is the highly successful and larger company in this sector.
The SDY share price has almost flatlined for a number of years now, but was particularly volatile around the onset of the pandemic last year. The company relies heavily on the construction sector for revenue generation, so the volatility is understandable. It’s a risk to consider if we experience another lockdown as the business would suffer.
However, it’s the growth in earnings I’m most attracted to. For this year, earnings are forecast to rise 70%. In the following year, they’re still forecast to grow a respectable 21%. Of course, I have to remember that both here and with SGC, forecasts could always be missed.
I don’t think the shares are up to speed with the potential earnings growth. The current price-to-earnings ratio is only 15, which I consider good value for my portfolio given the growth potential.
Finally, I like the look of Inspired Energy (LSE: INSE). It’s a leading commercial energy advisor, providing insight and consultancy for UK businesses. It says such companies spend £17.7bn annually on energy, so there’s a lot of potential for cutting costs and lowering overall energy consumption. Earnings are forecast to grow 88% this year, and a not too shabby 16% the year after.
There’s a great angle on Environmental, Social and Governance investing here too, as Inspired Energy helps businesses to reduce their environmental impact.
But rising energy prices may be an issue for the firm. Smaller energy providers have gone into administration, which makes it more challenging to switch to cheaper tariffs. It’s a risk to consider before I buy the shares.
Dan Appleby 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.