3 penny stocks to buy for 2022

These penny stocks appear to be significantly undervalued and have the potential for substantial growth over the next year, says this Fool.

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British Pennies on a Pound Note

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I have been looking for penny stocks to buy for my portfolio in 2022. I think investing in these smaller businesses could be one of the best ways to invest in the UK economy for the year ahead. That is why I have been concentrating my efforts on this section of the market. 

As such, here are three penny stocks I would acquire for my portfolio today

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Penny stocks for growth

The first company is retailer Card Factory (LSE: CARD). After a tough couple of years, the business may see a recovery in 2022. 

According to the group’s latest trading update published at the beginning of November, sales had recovered to near pre-pandemic levels by the third quarter. The company has also been able to substantially reduce net debt, putting it in a solid position to return to growth next year. 

Despite the return to growth, the stock is trading at a relatively attractive forward price-to-earnings (P/E) multiple of just six. That seems too cheap to me. 

The group may face risks as we advance, including the supply chain crisis and higher costs due to wage inflation. This could have an impact on profit margins. 

Outperforming expectations 

This year, one company that has outperformed all expectations is the automotive retailer Pendragon (LSE: PDG). Booming demand for second-hand vehicles has pushed used vehicle prices to record highs, and the corporation has been able to capitalise on this demand.

City analysts are forecasting a net profit for the group this year of £51m. This projection is based on management’s own forecasts. If the company hits this target, it will be the first time it has earned a profit since 2017. 

And, once again, despite this incredibly attractive underlying fundamental performance, the stock is extremely cheap. It is trading at a P/E ratio of just 4.7, based on earnings projections for the current financial year. Unfortunately, analysts are expecting growth to slow next year. Still, even on these lower growth projections, the stock looks cheap. It is dealing at a 2022 P/E of 6.7. 

Investors may be worried about the company’s high level of debt. This could become an issue as interest rates begin to rise. A drop in used-car prices may also hurt group earnings growth. 

Outsourcing demand 

Capita (LSE: CPI) recently published a depressing trading update. The company warned that contract attrition would have an impact on revenue growth as we advance.

This is disappointing, but the enterprise has made substantial progress in other areas. It has made a material reduction in net debt over the past couple of years and built sustainable foundations for future growth. 

It seems likely the company will continue to encounter turbulence in the near term. Overcoming contract attrition rates will be the biggest challenge the group has to deal with in the next year or so. 

However, I am willing to take a risk on this company for my portfolio of penny stocks considering its depressed valuation. The shares are selling at a forward P/E of just 7.8, falling to 5.4 for 2022. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Card Factory and 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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