Penny stocks are seen as quite risky investments. After all, they are priced low for a reason. However, I believe some FTSE penny stocks could lead to generous returns in the long run.
Is this the best FTSE penny stock right now?
Mitie (LSE:MTO) is the UK’s leading facilities management and professional services company and a major player in the industry. It employs approximately 50,000 people who look after over 2.5m worth of assets. Mitie is one of Britain’s largest government contractors. Could MTO be one of the best penny stocks on the FTSE? It is a huge company and plays a vital role in the government’s infrastructure. Here’s my verdict.
Penny stocks lose big in market crash
When the market crashed, many FTSE penny stocks lost significant share price value. Mitie lost over 50% of its share price value on the FTSE All Share. At the beginning of the year, its per share price was close to 80p before plummeting close to 35p. The share price began to recover, reaching close to 50p before a rights issue was announced last summer. I believe this negatively affected its price.
Currently, the Mitie share price stands close to 60p. This is its highest price point since March 2020.
Favourable trading update
MTO released a strong third-quarter trading update at the end of January. Revenue rose 6.7% to £573.9m. It confirmed sales rose as Covid-19 lockdown restrictions eased in the summer period. Mitie plays a critical role for the UK government in the fight against Covid-19 through its multiple support contracts.
For the nine months to December, Mitie’s revenues were down 4.3% year-on-year at £1.55bn. One of the main reasons behind this was the loss of a Ministry of Justice contract. In addition to this, an active NHS Properties contract saw its scope reduced.
Overall, MTO was happy with sales and exceeded its own expectations. The support services provider chalked up £770m worth of new contracts in the nine months to December, it said. MTO’s profit consensus for the full fiscal year has been upgraded to surpass initial forecasts due to a positive nine months.
There are risks involved. My biggest concern is MTO’s debt levels and debt track record. Its level of total liabilities and conversion of EBIT (earnings before interest and taxes) to free cash flow definitely weigh it down, in my opinion. But the good news is it seems to be able to grow its EBIT with ease.
Another risky factor that could affect its standing is the Covid-19 pandemic. In its trading update, it confirmed that Q4 trading is expected to be lower than Q3. In my eyes, this is no doubt linked to the fact we have been in a lockdown since December 2020.
At its current price, it is cheap but climbing for two reasons, in my opinion. Firstly, it has reported positive results. Secondly, insiders seem to be buying shares. This is usually a sign of confidence and one I like. I would not class Mitie as THE best FTSE penny stock out there but I believe it is still worth seriously considering for my portfolio.
Away from penny stocks, here is one of my best stocks to buy now on the FTSE that I believe is worth a serious look.
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Jabran Khan 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.