Let’s dive into the investment case of each to help me decide whether or not I should buy some shares.

Alternative Income REIT

Setup as a real estate investment trust REIT), Alternative makes money from income-producing properties. These can range from office space and housing to logistics facilities and more.

One of the biggest draws of investing in these types of trusts is that they’re mandated to return 90% of profits to shareholders.

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From a bullish view, I’m a fan of Alternative’s diversification. I’ve found that the majority of REITs tend to focus on one type of property, be it housing or healthcare space, to provide a couple of examples. Alternative has assets across a few industries. The good thing here is that diversification mitigates risk.

Next, the shares offer a mammoth dividend yield of 8.9%. This is significantly higher than the FTSE 100 average of 3.9%. However, I do understand that dividends are never guaranteed.

Plus, based on its net asset value of around 80p per share, the shares are 14% undervalued. The shares currently trade for 70p.

From a bearish view, high interest rates are putting significant pressure on REITs from a rent collection, growth, and net asset value perspective. If these rates come down, earnings and returns could climb. While rates remain high, they present a real risk to shareholder value.

I’d be willing to buy some Alternative Income shares when I next have some free funds.

Ebiquity

Marketing analytics and media consultancy firm Ebiquity is a bit of an enigma. Firmly in the penny stock category, the business is small on paper, but there are lots of pros when I dig into the investment case.

Firstly, the shares look undervalued by approximately 70% based on the discounted cash flow (DCF) model.

Next, the business has a decent track record of performance to fall back on. It has grown earnings each year at a rate of just over 6% for the past five years. Although it’s not a spectacular rate of growth, it represents what looks like a steady ship in the volatile world that is penny shares. I do understand past performance isn’t a guarantee of the future.

Finally, analyst forecasts are tipping remarkable growth for the coming years. However, I always take analyst forecasts with a pinch of salt, especially for small-cap shares. They may not come to fruition.

Looking at cons, it’s obvious that Ebiquity is a small fish in a large pond. Competition from larger firms in the space with bigger muscles to flex could present growth challenges moving forward. Alternatively, it may be bought out and swallowed by a larger firm in the space. Plus, marketing is usually one of the first cuts to budgets when economic volatility hits, like now.

Overall I’m going to watch Ebiquity shares for now, and may be tempted to buy some soon as things develop.

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Undervalued?

The current valuation’s particularly eye-catching. According to a discounted cash flow (DCF) calculation, the shares are currently 75.5% below estimated fair value. This substantial discount could potentially signal an enormous opportunity for investors willing to navigate the inherent risks of penny stocks.

The company’s historical performance adds another layer of interest. Over the past five years, Ebiquity has demonstrated consistent growth, with earnings increasing 6.6% annually. This track record of steady expansion, while not spectacular, suggests a resilience that’s particularly valuable in the volatile penny stock sector.

Looking forward, the growth projections for the firm are pretty encouraging. Analysts forecast earnings growth of 63.88% a year, a figure that would be impressive for any company, let alone a small-cap entity. Such robust growth expectations, if realised, could translate into substantial returns for early investors.

Approach with caution

However, it’s crucial to approach these projections with due caution. The gap between analyst expectations and performance is notable. While analysts predict 165% growth for the shares in the coming years, the company’s recent performance tells a different story.

Over the past year, the stock has declined by 17%, significantly underperforming the broader UK market’s 10.9% gain.

This disparity between analyst optimism and market reality underscores the importance of thorough, independent research. It also highlights the potential volatility inherent in penny stocks, where rapid price movements in either direction are not uncommon.

The numbers

The company’s financial health presents a mixed picture. Analysts approve of the firm’s “excellent balance sheet“, with a manageable debt-to-equity ratio of 52.5%. However, a lack of profitability remains a concern for me. In its most recent earnings report, management posted a net loss of £4.31m on revenues of £80.20m, resulting in a negative net profit margin of 5.38%.

Despite these challenges, the business has displayed surprisingly low price volatility compared to its industry peers and the broader index. This stability could be appealing to investors looking to get started in the typically more turbulent penny stock market.

One to watch

The company’s diverse geographical presence, spanning the UK, Ireland, North America, Continental Europe and Asia Pacific, provides a degree of market diversification. I’d suggest that this global footprint has offered some insulation against localised economic downturns, where many similar sized companies may struggle.

So while it may be premature to declare Ebiquity the standout among penny stocks, it certainly presents an interesting case for consideration. The combination of apparent undervaluation, solid historical growth, optimistic future projections and global presence makes it a company worth watching.

However, potential investors should remain mindful of the risks of investing in penny stocks. Things can change quickly, and often without a clear catalyst. For that reason, I’ll just be adding the company to my watchlist for now.

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Does that mean it a good time to buy penny shares now? With a bit of care, yes, I think it is.

I’m looking at three here with market caps between £50m and £100m, and share prices between 50p and 70p. They’re all listed on the Alternative Investment Market (AIM).

Investment

Ebiquity (LSE: EBQ) provides investment analysis and marketing analytics.

We’ve seen losses for the past couple of years. But forecasts show a profit for 2022, with results due on 30 March.

Revenue is reportedly up by 20%, with organic revenue up 9%. A 12% operating margin is four percentage points up on the prior year.

There’s £8.9m of net debt. But against a market cap of £63m, that looks fine to me.

Profit forecasts suggest a price-to-earnings (P/E) ratio of around 20. And that’s not obviously cheap. But if the outlook for the next couple of years is accurate, we could see it plunge to only around seven by 2024.

Ebiquity’s business must be vulnerable to any extended economic downturn, and I think that’s the biggest risk.

But if profits are sustainable now, I think it could be a long-term buy.

Lithium

CleanTech Lithium (LSE: CTL) floated on AIM in March 2022 at 30p. Since then, it’s up 66%.

The company has two lithium prospects in Chile. And any investment is a play on the future of demand from the battery business.

There are no profits on the table yet. Or, in fact, any revenue. So CleanTech has got to be the riskiest of the three. But I think it has a few things in its favour over rival lithium explorers.

Its operations in Chile appear stable and uncontroversial, and it has plentiful renewable energy resources at its disposal.

And thanks to its IPO and subsequent cash-raising activities, it looks to be sufficiently funded at the moment.

The success of an investment will depend on how long it takes CleanTech to reach profit. And forecasts don’t go that far yet. But I’m tempted to risk a small amount.

Property

Property shares seem like poison right now. And OnTheMarket (LSE: OTMP), which provides a residential property portal for potential buyers, sellers, landlords, and tenants, has suffered.

The company has had a couple of very tough years, and its shares have been on a long, slow slide.

And, well, the 2023 outlook for the property market isn’t exactly the brightest I’ve ever seen. But forecasts suggest it could be a turnaround year for the firm.

OnTheMarket’s year ended in January, and the latest trading update looks good. Operating profit should be between £4m and £4.5m (up from £2.7m).

And there’s £10.4m in cash on the books, with no borrowings.

Forecasts indicate a big rise in profits, which could drop the P/E to around nine by 2025. Even with today’s property risk, I think that’s cheap.

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