4 reasons why this penny stock could double over coming years

Jon Smith offers several reasons for a particular penny stock to rally in the near future based on the current trajectory that it’s on.

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Penny stocks — with a share price below 100p and a market cap under £100m — usually carry higher levels of risk than larger counterparts. Yet due to their small size, the scope for drastic share price growth is also higher. Here’s one I feel could rocket in coming years.

A fallen angel from the pandemic

The company in question is the City Pub Group (LSE:CPC). It was formed back in 2011 and has a portfolio of 43 pubs mostly around Southern England. Many of its locations are in or around London.

The current share price is 85p, giving a market cap of £90m. However, the stock has been significantly higher in the recent past. Just before the pandemic, the share price was over 200p. This is the first reason why I feel it’s not out of the question for the stock to double in the future. But of course, I can’t judge the future from the past.

Following on from this relates to how the business can get back to pre-pandemic levels of trade. In 2019, profit before tax was £2.2m. Last year, it was £0.2m. Critically, it made a profit after two years of pandemic losses. The trading update to early June highlighted sales up 20% versus last year, leading me to think profitability should also be rising.

The share price is correlated to financial results. Therefore, I expect revenue and profits to continue to recover and hit similar figures to 2019 over the coming couple of years. If this happens, the share price should be close to the pre-pandemic price.

Doing well in the current environment

The stock is already up 22% over the past year. This comes during a period where investor sentiment hasn’t been that positive. Concerns around high inflation, high interest rates and a gloomy UK economy have all meant that the stock market hasn’t performed that well.

Add to this the fact that during times of uncertainty, penny stocks (with higher risk) are often shunned in favour of more defensive stocks.

So the share price outperforming despite all of this bodes well for the future. Within the next couple of years, I’d expect sentiment to improve. This should link to inflation coming down even further and maybe even interest rate cuts. If this happens, I’d expect City Pub Group stock to fly even higher.

Rallying 22% during a damp period in the market is impressive. For example, the FTSE All Share index is down 5% in a year. Yet during good times, I wouldn’t put 30-50% annual gains out of the question. Let’s not forget that during summer 2018, the stock jumped 55% in five months thanks to a strong company performance.

However, a mixture of persistent inflation and an underperforming UK economy would be two key risks to my overall view.

Inorganic expansion plans

Further expansion is another reason that could boost the price. Thanks to a 52% shareholding recently acquired in the Mosaic Pub and Dining Group, operational control of nine extra pubs is coming on-line.

This, along with plans for pubs in Wales, could help to drive revenue higher over the next year. If this filters down to higher profit, I don’t see why the stock can’t get back to pre-pandemic levels.

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.

Jon Smith 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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