2 ‘dirt-cheap’ penny stocks to buy for 2022

The UK stock market is home to dozens of penny stocks. Harshil Patel considers two favourites for his ISA.

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I’m looking for a basket of ‘dirt-cheap’ penny stocks to buy and hold in 2022. I’m particularly looking for lesser-known shares that could be hidden gems. Some of the cheapest stocks can often be those that are growing their earnings the fastest.

Fast-growing penny stocks

One fast-growing penny stock is Frenkel Topping (LSE:FEN). It provides financial services advice, particularly for clinical negligence and personal injuries. With a market capitalisation of just under £100m, it’s firmly in the small-cap group. Small companies can often provide the best opportunities to grow, in my opinion.

Frenkel is currently growing assets under management at 15% per year. This is much higher than most independent financial advice firms, in my opinion. Its growth strategy is underpinned by acquisitions. This market is fragmented and there are many smaller players. Frenkel is aiming to be a full-service provider in this niche area by buying up these small firms, often owned by advisers approaching retirement.

It looks like the strategy is working. Recent trading is strong and earnings continue to grow. It demonstrates good quality with a return on capital employed of 10% and a 19% profit margin.

There are a few points to bear in mind, however. It operates in a competitive industry so it will need to keep up with service levels and pricing. Reputational damage could also be a challenge to recover from in this business. Overall, I’m warming to this penny stock and would consider a small holding for my Stocks and Shares ISA.

Much to like

My next penny stock pick is also in the financials sector. It’s financial advisory firm Finncap (LSE:FCAP). With a market capitalisation of £65m, it’s even smaller than Frenkel. Finncap has a strategy of “building a broader financial advisory firm – focused on servicing the needs of the business of tomorrow.” It looks like it’s working so I’ve been keen to take a further look.

There’s much to like about Finncap, in my opinion. It looks like a well-run business that’s growing. Recent trading is encouraging. In the six months ending 30 September, revenues grew by 55% and profits rose by 67%. The record half year included 39 transactions with a total deal value of around £2bn. Looking forward, the deal pipeline looks great too. There are several potential IPOs and equity fundraisings due to be completed over the coming months.

To bear in mind

That said, Finncap operates in a cyclical industry. And although the current market conditions are favourable, that won’t always be the case. I’d have to be aware of when business starts to slow in the next downturn. Also, its shares are relatively illiquid. That could result in sharper share price movements, in either direction.

In addition to its growing business, I like that it has a strong balance sheet. It also offers a relatively generous dividend yield of 4.7%. This gives me a certain cushion of safety. Overall, I like what I see and would consider buying these penny stocks for a part of my portfolio.

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.

Harshil Patel 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.

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