Here are two penny stocks I’m considering adding to my Stocks and Shares ISA. I’d buy as I think they could rocket in value during the new bull market.
Switching through the gears
The amount that people and businesses spend on buying cars tends to pick up strongly during the early stage of the economic cycle. I think demand for new motors might be stronger than usual this time around as people skip using public transport in larger numbers following the global pandemic.
This all plays into the hands of car retailers like Pendragon (LSE: PDG). Indeed, latest figures from the Society of Motor Manufacturers and Traders shows that the industry is already showing signs of recovery. New motor sales in Britain soared 11.5% in March, it said, the first month of growth since late summer.
City analysts think Pendragon will bounce back into the black in 2021 with earnings of 1.8p per share. They think, too, that annual profits will soar 23% next year to 2.1p per share. But beware that a third wave of Covid-19 infections could hammer these forecasts as economic conditions would worsen again and Pendragon’s showrooms would close. Sure, improvements to the retailer’s e-retail model during the pandemic will help it continue to do business. But a better digital offering won’t be able to blunt the damage to a considerable degree.
The Pendragon share price still looks cheap despite recent heady gains. Today this penny stock trades on a low forward price-to-earnings (P/E) ratio of 11 times. It carries a 4.5% dividend yield for 2021 too. All this makes this UK reopening share an attractive buy for my portfolio, in my opinion.
Another topp penny stock
Topps Tiles (LSE: TPT) is another penny stock whose profits I think are likely to soar during the new bull market. Like Pendragon, this UK share is in danger if extra Covid-19 lockdowns are forthcoming. But for now things are looking good for the building materials supplier.
In late March it said that it expects “a sharp increase in sales” and a margin recovery to “more normal” levels from this month. The business saw like-for-like retail sales soar almost 20% in the 13 weeks from October 1 as pandemic restrictions eased. Demand from both professional traders and homeowners remains strong, and this underpins City expectations that Topps Tiles’ annual earnings will soar 144% and 22% in the fiscal periods to September 2021 and 2022 respectively.
Consumer spending always perks up strongly during the early stages of economic recoveries. This should also drive sales at Topps Tiles in the short-to-medium term. That said, a shortage of qualified tilers could hamper demand for its products over the period. This is a problem that could persist too given the impact of Brexit on worker inflows from abroad.
Still, I think Topps Tiles’ low valuations makes it a great buy for me today. The penny stock trades on a forward price-to-earnings growth (PEG) ratio of 0.2. Any reading below 1 suggests that a UK share could be undervalued by the market.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.