A penny stock is unsurprisingly priced in pence not pounds. These tend to be smaller market capitalisation companies, and are typically high risk but with potentially higher rewards as well. I don’t devote a large chunk of my Stocks and Shares ISA portfolio to speculative stocks. But, there are a couple of interesting penny stocks that have caught my eye.
Record (LSE: REC) is a £191m market cap UK-based currency management firm. It assists institutions, like pension funds, that hold foreign assets. The foreign currency value of those assets might go up, whilst their sterling value drops because of exchange rate movements. For a fee, Record will help manage that risk. It can also attempt to help clients profit in the foreign exchange market.
The company has grown its annual sales and net profit by 8.9% and 6.44% respectively, on average over the last five years. But there are suggestions that things could get even better. Assets under management (AUM) increased by 6.4% in the most recently reported quarter. More assets means more revenue from management and performance fees. Most of the asset growth is from doing more of the core activity of currency management.
There was a leap in AUM from March 2020 to March 2021, possibly hinting at a COVID stock market volatility boon. But, clients appear to be sticking around as 87% of clients have been with the form for over a year. A big risk is that that Record stops performing for its clients, leading to asset outflows. Another risk is consolidation and growth in the asset management space. As firms get larger they are likely to bring currency management services in-house. But still, this 97p per share penny stock looks appealing.
Penny stock heating up
According to a non-executive chairman, £147m market cap Sureserve (LSE: SUR) aims to double its sales and significantly improve its net profit margin and earnings per share within the next four years. Achieving that goal would likely take the Sureserve share price from the 87.5p it now trades at into pounds territory. Restructuring is part of the progression towards the goal.
Two businesses, Precision Lifts and Sureserve Fire and Electrical, are currently classified as held for sale. Core operations are now focused on heating, gas appliances, smart metering, and energy efficiency installation and maintenance services for social housing tenants. The company contracts with housing associations and local authorities, private landlords, and the Scottish and Welsh governments. I think this suggests Suresave’s revenues will tend to be non-volatile and recurring. Since the balance sheet is already strong, cash from the sale of non-core businesses should be reinvested into the core business so those lofty ambitions do have a funding base.
I do worry that doubling sales will involve stepping outside where it is currently strong geographically and possibly bring increased competition. This could reapply pressure on its improving operating margins. So, as with Record, my first impressions of Sureserve are encouraging. But, I still have research to do and won’t be rushing to buy. I am extra vigilant with speculative penny stocks. I have found through experience that it’s better to allow my first impression the benefit of time and further research to see if it holds up to scrutiny.