A penny stock is one that has a market cap below £100m and a share price of less than £1. Within the UK stock market, there are plenty of firms that fit this description. It takes time to sift through potential options to try and find the next small company that could have high growth potential. But here’s one that I think I’ve spotted.
And the candidate is…
Marks Electrical Group (LSE:MRK) has been in business for over 35 years. Yet it only went public in late 2021, so it’s still a relatively new stock for investors to consider.
It operates a relatively simple business model of selling electrical goods and appliances online. Over the past year the share price has jumped by 25% thanks to better than expected financial results.
For example, the 2023 results showed a 21.5% increase in revenue. This comes on the back of a 44% jump in the 2022 full-year number. It means that the 2023 figure is 75% higher than revenue from two years ago. Clearly, the business is enjoying a strong period of growth.
Reasons for the growth
There are several factors that are helping to drive Marks forward. The team reacted to the cost-of-living crisis and introduced flexible credit solutions and packages for purchases. This has helped to boost revenue. Of course, credit needs to be managed carefully, to avoid default risk further down the line.
Another smart move has been expanding into different product categories with a much broader item range. Given the online shop can allow for an extensive range without having to stock all the goods at once, this makes sense. As a result, Marks can capture a larger client base due to offering more products.
It might only sound like a small point, but the central location in Leicester it another big plus. It allows the firm to send out a lot of products on a same-day delivery basis. It offers free delivery for large ticket items. As we all know, speed of service is something that consumers have become accustomed to.
Optimistic going forward
As mentioned in a company report, Marks “still only [has a] 1.6% market share of the £5.4bn UK MDA market”. This highlights the scope for further growth and higher profits in years to come.
Granted, competition in this space is intense. The firm has done well to try and find ways to differentiate itself, as this sector can very often simply boil down to which retailer is the cheapest. But it’ll have to continue to think outside of the box to stay ahead of much larger competitors. The business also has pressure from rising costs, which can quickly eat into profit margins.
Despite these risks, I believe the stock can rally in coming years as I expect revenue growth to continue. Even if it can gain just another 0.1% market share, it probably won’t be a penny stock for too long. On that basis, I think investors should consider buying the stock.
