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Penny stocks: 1 to buy for June

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Penny stocks can be seen as risky investments. They can be priced low for a reason. With that in mind, however, I believe some FTSE options could lead to generous returns longer term, especially with the economy reopening in full swing. 

1 FTSE 250 option I like

Mitie (LSE:MTO) is the UK’s leading facilities management and professional services company. It looks after over 2.5m worth of assets with its 50,000-plus workforce. It is also one of Britain’s largest government contractors. With its large footprint, workforce, and the fact it plays a vital role in the UK government’s infrastructure, I believe it could be one of the top FTSE penny stocks out there.

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As I write, I can buy shares in Mitie for 69p per share. Rewind to one year ago, and it was trading for 41p, which indicates close to a 70% increase. The market crash had an adverse impact on most stocks, and even more so on penny stocks. Mitie’s share price fell from 74p to 32p, which is a 56% decrease. Based on its current price, I believe it is beginning to recover from the crash and that it will continue to climb too.

Recent performance

Mitie’s most recent trading update was a third-quarter update released back in January. An announcement on fourth-quarter and preliminary full-year results is expected at the end of next month. In the Q3 update, it confirmed revenue rose over 6%, in part due to restrictions easing over the summer. This will be due to Mitie’s key role in the government’s fight against Covid-19 and its multiple support contracts.

Overall, for the nine months to December, Mitie reported a decrease in revenue of 4.3% year-on-year. The overall figure stood at £1.55bn. This was due to a Ministry of Justice contract it lost and an active NHS Properties contract that was reduced in scope.

Despite this, Mitie reported its satisfaction with results that exceeded expectations. Approximately £770m worth of new contracts were won in the nine months to December. It also confirmed it is expecting to exceed forecasts in its next set of results, which I like to hear.

Penny stocks have risks and rewards

I have a few concerns over Mitie based on its debt level and a questionable 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 with new contract wins and new business.

Next, the Covid-19 pandemic could continue to disrupt Mitie. 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 were in lockdown for the most of winter, and for all we know, there could be further lockdowns ahead if new Covid-19 variants occur.

Despite the obvious risks, I do like Mitie as one of my penny stocks choices. A couple of months ago, some insiders were buying shares. I usually take this as a sign of confidence. It is priced well and is still increasing. I wouldn’t be surprised if after next month’s results, its share price were to increase. I am seriously considering adding Mitie to my portfolio in June.

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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.

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