Many penny stocks have taken a tumble this year. Soaring inflation, and concerns of a recession have taken their toll on UK small-cap shares. But herein lies an opportunity.
If I was investing £3,000 in a Stocks and Shares ISA right now, I’d consider splitting it between two cheap penny stocks.
Under pressure
First, I’d consider fast-fashion retailer boohoo group (LSE:BOO). From 2015 to 2020, boohoo’s share price gained a whopping 1,300%. It became a popular and fast-growing business aimed at 16-24 year olds. But the pandemic brought a string of challenges that resulted in a 73% fall in its share price over the past year.
This is a billion-pound British business that has suffered several setbacks in recent years. It faced stronger competition from Chinese rival Shein, and it battled high shipping costs that has plagued many global companies during the pandemic. Longer delivery times negatively impacted the fast-fashion proposition.
More recently, it reported that customers were returning more items, which added pressure to its profit margin.
Why buy this penny stock?
With so much negative news, why do I want to buy this stock? I reckon these shares have become so cheap that all of these points have been factored into the share price. The stock market looks ahead and tries to anticipate how a business will fare in the coming months and years.
Although the next few months could remain weak amid a fragile economic climate, the long-term picture looks much brighter.
A bright future ahead
During the pandemic, many clothing retailers struggled. And boohoo managed to buy many popular brands that were on the edge of bankruptcy.
It also expanded into older demographics with the purchase of Debenhams and Karen Millen. These additions could be a game-changer if I take a long-term view.
When the dust settles, and the economy recovers again, boohoo could be in an enviable position. By then, I’d expect the share price to be much higher though. That’s why I’d consider buying these penny shares now.
Bags of potential
With a market capitalisation of just £88m, my next penny stock pick is a small company called Frenkel Topping (LSE:FEN). It’s a specialist financial services company that operates in the personal injury and clinical negligence space.
In contrast to boohoo, this business is performing very well. Sales and pre-tax profits both jumped by 80% in 2021 versus the prior year. More recently, trading in the first three months of this year has also been “robust”.
Encouraging strategy
For the 13th consecutive year, it has a client retention rate of 99%. That’s impressive and suggests to me its customers are happy with Frenkel’s work.
Its management has a buy-and-build strategy, which means it aims to buy complementary companies to add to its platform. If done well, this method can add great value over time. So far, I’m encouraged by what I’ve seen.
That said, there’s much competition in this industry, so it will need to keep working hard to provide value to its clients. Buying other businesses carry risks too. It will have to ensure it doesn’t overpay.
Overall though, I’m impressed by this little company and would buy these shares for a long-term holding.
