Penny stocks: 2 AIM shares to turn my pennies into pounds

Penny stocks are worth exploring as they could explode in value if the tide turns their way. So, here are two AIM shares I plan to buy.

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The Alternative Investment Market (AIM) is a sub-market of London’s main stock exchange. The index is host to many small-cap constituents with high growth prospects. So, here are two penny stocks I’ve got on my watchlist that I think have the potential to grow my money exponentially.

1. Hotel Chocolat

After its share price dropped by as much as 75% last year, Hotel Chocolat (LSE:HOTC) shares may seem like an odd pick, especially with a recession on the cards. However, I think there are key catalysts that bears have discounted.

The first is consumer behaviour during a recession. It’s interesting to note that chocolate sales have somewhat of an inverse relationship with consumer confidence. This can be attributed to the lipstick effect — the behaviour of indulging in small luxuries when there’s economic uncertainty. This was evident in its latest half-year update which saw UK sales increase by 7%.

UK Chocolate Sales vs Consumer Confidence.
Data source: PRODCOM, GFK

Still, the company can’t shy away from its overall revenue dropping by 9% due to a weak international offering, as it’s always underperformed overseas. Even so, the penny stock is adamant on trying again in Japan. Only this time, it’s doing so with much less capital and more experience as it partners with local conglomerate Eat Creator.

More lucratively, the shares are currently trading at decent value with a great balance sheet boasting no debt. Its current valuation isn’t cheap by any means, but if the chocolatier achieves its goal of 20% EBITDA margin by FY25, starting a position now could present huge upside potential. After all, broker Leberium rates the stock a ‘buy’ with a price target of £3.00.

MetricsValuation multiplesIndustry average
Price-to-sales (P/S) ratio1.20.5
Price-to-book (P/B) ratio3.01.0
Data source: YCharts, Simply Wall St

In fact, had I bought the stock when I first recommended it in late November, I would’ve been up by 35%. Thus, I don’t want to miss out this time, and I plan to start a small position soon.

2. Concurrent Technologies

Like many other tech-related companies in 2022, shares in Concurrent Technologies (LSE:CNC) suffered a downturn. Thankfully though, its drop wasn’t as drastic as many, due to its client base (aerospace, defence, and telecoms), which is more insulated from economic downturns.

In its latest trading update, the company mentioned that it expects its revenue for 2022 to beat consensus (£16m) by 10%, with pre-tax profits coming in as expected (£0.1m). And with the semiconductor industry seemingly at a bottom, a rebound could be on the cards, with Concurrent standing to benefit.

The firm ended last year with its highest ever order backlog as order intake rose by more than 25%. As such, the board is expecting to see significant revenue growth in 2023 as it plans to increase its production capacity.

Nonetheless, Concurrent’s investments in components, R&D, and improving its systems to mitigate supply shortages in 2022 saw its free cash flow tumble. As a result, its 3.4% dividend yield isn’t going to be paid out in the near future as the AIM stalwart looks to claw back its capital. But with a flawless balance sheet, it’s certainly got the right foundation to propel its free cash flow back up.

Concurrent Technologies Financials.
Data Source: Concurrent Technologies

The penny stock isn’t exactly the cheapest based on its current multiples, which is something I’m cautious of. That being said, its long-term growth still entices me to start a small position given its upside potential.

MetricsValuation multiplesIndustry average
Price-to-earnings (P/E) ratio30.033.9
Price-to-sales (P/S) ratio3.01.1
Price-to-book (P/B) ratio2.31.1
Forward pice-to-earnings (P/E) ratio40.925.3
Data source: YCharts, Simply Wall St

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.

John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat Group Plc. 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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