At 11p, this penny stock is primed to explode higher

Jon Smith flags up a penny stock that just had the best quarterly performance on record and is well placed to kick on for the rest of the year.

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Penny stocks come in various forms. Fundamentally, they share the criteria of having a market cap below £100m and a share price below £1. Apart from that, there’s a huge breadth to choose from. I’ve spotted one that actually is piggybacking off the success of a much larger company.

Given that it just reported some record results, I think investors should consider this in detail.

An interesting proposition

DP Poland (LSE:DPP) might not ring many bells for people. Yet what if I told you that the DP stood for Domino’s Pizza? Then all of a sudden you’d be aware of the famous pizza brand that sits in the FTSE 250.

DP Poland is the operator of Domino’s Pizza stores and restaurants across Poland and Croatia. It holds the master franchise rights to the brand, with over 100 stores in operation.

Back at the start of the year, I covered the main pizza company and wrote about how I was impressed with the growth in revenue and strategy for opening more stores. The market certainly isn’t as saturated in the UK as I initially imagined.

The same is the case for DP Poland. In the latest trading update, the CEO spoke of “2023 being a record year and Q4 being the strongest quarter in the Company’s history”.

In comparison to Q4 2022, system sales in Poland increased by 27.5% to the highest in the company’s history. For the full-year, sales increased by 19.7%.

Growth for the future

The share price has responded to the positive momentum from the past year. Over this period, the stock has risen by 22%. However, I think the stock is primed to shoot even higher based on the outlook.

For example, it wasn’t just sales growth that has been noted by the management team. Customer satisfaction ratings are up, telling me that customers are more likely to come back and turn into loyal repeat business.

Further, inflationary pressures are now easing. This will help the company to increase profit margins, as raw material costs are no longer spiralling higher out of control. Customers should also feel more confident in spending on food if they are less worried about a cost-of-living crisis.

Risks

With a market cap of just £76m, the company is small. This means that the business could be outmuscled by larger competitors that have deeper pockets and can steal market share.

I’m conscious that the share price swings can be erratic, with high volatility. Even relatively small buy and sell orders from investors can move the price a lot. Therefore, I have to be aware that my unrealised profit and loss can change very rapidly if I bought the stock.

Ultimately, the penny stock does carry higher risk than a larger alternative. Yet the potential reward is also much larger here. Therefore, I’m considering investing a small amount of money in DP Poland.

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 recommended Domino's Pizza 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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