But there are still plenty of great UK shares I think should thrive irrespective of the public health crisis. So let’s put Covid-19 to one side for a second and keep things cheery.

Here are three such British stocks I’m considering buying this Christmas. Each costs less than £5!

A magical UK share

Harry Potter is the gift that keeps on giving for Bloomsbury Publishing (LSE: BMY). It’s been a quarter of the century since JK Rowling’s boy wizard hit the bookshelves and yet readers remain spellbound by his capers.

This makes Bloomsbury one of the most secure media shares to buy in my book. According to Nielsen, Harry Potter and the Philosopher’s Stone was the fourth highest-selling children’s book in the six months to August.

But Bloomsbury is about much more than Harry Potter. Its foray into academic publishing is also paying off handsomely and sales here soared 32% between March and August.

I think this cheap UK share’s a top buy, even though poor reviews of a new title could have a significant impact upon group sales. Bloomsbury trades at 345p per share right now.

The gaming great

Video game sales have rocketed over the past decade as gaming as a mainstream pastime has taken off. I’ve invested in software development support company Keywords Studios to grab a slice of this action.

And I’m tempted to invest in one of London’s listed games publishers like tinyBuild (LSE: TBLD) too following Keywords’ latest update on Monday. Then it said it was hiking full-year profits forecasts thanks to what it described as a “buoyant” video games market.

Investing in publishers like tinyBuild carries a higher degree of risk than services providers like Keywords. Competition in the games market is intense and smaller publishers like these lack the resources of the mega studios like Electronic Arts and Activision Blizzard to win consumer attention.

But I’m encouraged by tinyBuild’s track record of making highly-popular games such as Hello Neighbor. This tech company trades at 187.5p per share.

A top penny stock I’d buy

As a long-term investor, there’s a lot I like about Hornby (LSE: HRN) shares. Demand its train sets, miniature cars and model kits isn’t likely to explode any time soon. But I love the decades-old appeal that its brands like Corgi, Airfix and Hornby command with hobbyists.

I feel certain they will continue to draw in revenues many years from now. Latest financials showed sales rise 3% in the six months to September.

My main concern with Hornby are supply chain problems that could hit manufacturing and push up costs. That said, I believe the benefits of owning this cheap UK share more than offset the drawbacks. Penny stock Hornby trades at 40p per share.

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A penny stock for the homeworking boom

Fresh Covid-19 restrictions in Britain could potentially provide a boost to software firms like 1Spatial (LSE: SPA). New ‘Plan B’ rules have put homeworking firmly back on the agenda, meaning companies will have to keep spending to keep their workers connected. This bodes well for 1Spatial because it provides location master data management (or LMDM) software that allows users to connect and to share data from multiple sources in different locations.

Latest financials showed 1Spatial’s revenues rise 8% in the six months to July as the steady migration from office working to remote working continued. I think this penny stock’s a great way for me to make money from this theme in spite of the company’s elevated valuation. Today 1Spatial trades on a forward price-to-earnings (P/E) ratio of 68 times at current prices of 50p. Eye-popping multiples are extremely common among tech shares that have high growth prospects. But they also mean share price collapses can happen if news flow begins to worsen even marginally.

Full steam ahead

The prospect of new Covid-19 lockdowns also bodes well for UK hobby shares like Hornby (LSE: HRN). Sales at the models mammoth rocketed in 2020 as housebound Brits sought to entertain themselves. They’ve kept rising since then, too, even as restrictions have been scaled back. Revenues rose 3% in the six months to September.

I wouldn’t just buy Hornby because of the near-term profits boost it could receive from the pandemic. Its packed stable of products like Airfix model kits, Corgi miniature cars, and own-branded train sets are considered market leaders. The have a timeless appeal that allows the business to raise prices even when broader retail conditions are tough. I think this immense brand power makes them a top buy even though supply chain pressures are hitting sales right now. Hornby shares can be picked up at 40p apiece.

Cleaning up nicely

I believe Photo-Me International’s (LSE: PHTM) expansion into other rapidly growing self-service markets could help to turbocharge profits growth. The penny stock is perhaps best known for its photo booths and laundry services but it also operates amusement machines, digital photo printing points, and food vending machines. It has a broad geographic footprint, too, giving it extra strength through diversification as well as exposure to fast-growing emerging markets. Its roughly 45,000 machines are spread across 17 countries all over the globe.

Sales at Photo-Me could suffer if broader economic conditions worsen. Its machines are located in shopping malls, travel hubs, and supermarkets, places where footfall could drop if consumer spending comes under pressure. However, I believe the penny stock’s low valuation reflects this ever-present risk. At 58p per share Photo-Me trades on a forward P/E ratio of just 7.7 times.

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Legislative changes across developed and emerging markets require higher loadings of these metals in car exhaust systems. The escalating climate emergency means that regulations could become even tighter too.

PGM production at Jubilee is soaring (up 23% year-on-year in the first six months of 2021). And the company’s investing heavily in its operations like expansion of the Inyoni PGM facility to boost long-term output.

It’s important to remember that raw materials production is highly complex business. Costs can balloon and output levels can disappoint, dealing a huge blow to profits. Still, in my opinion, this South African mining giant’s risk-to-reward profile is highly attractive.

A model penny stock

The surging number of hobbyists during recent Covid-19 lockdowns makes Hornby (LSE: HRN) an attractive penny stock to buy today. In fact, soaring demand of its miniature railways and model kits from people in lockdown gave the company’s recovery from the travails of previous years a serious boost.

Indeed, Hornby’s latest financial statement last month indicated that “our outstanding order book is very strong and substantially higher than a year ago.” Okay, the company’s rebound might be blown off course by supply chain problems and a weakening of consumer confidence.

However, I find the thumping brand strength of products such as Corgi die-cast miniature cars, Scalextric slot car racing packs and its own-brand railway kits extremely reassuring, a quality that should help it to ride the worst of these problems. I expect them to remain hugely popular with hobbyists for decades to come.

Making money with the housing market

The shortage of new homes entering the market in Britain represents plenty of opportunity for UK share investors. I own stakes in Barratt Developments and Taylor Wimpey. They’ve made me solid returns as supply and demand imbalances have pushed property prices through the roof (no pun intended). But I also have an opportunity to play the favourable Irish residential property market with London-listed stocks. Cairn Homes (LSE: CRN) is one such share I’d buy today.

This Dublin-based business said last month that “demand for new Cairn homes, across all price points from entry level starter homes to trade-up/down, has never been stronger.” Cairn Homes, which is taking steps to build 2,500 new homes a year by 2022 to exploit this trend, saw revenues rocket 61% in the first six months of this year.

While the penny stock’s profits could be hit by soaring building products costs, I’m encouraged by news that house price inflation continues to outstrip the rate at which raw materials are rising in price. I’d happily buy Cairn alongside Hornby and Jubilee Metals in November.

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However, this potential for reward also comes with added risk. As such, these equities may not be suitable for all investors. 

Still, I’m comfortable with the level of risk involved with buying penny stocks. Here are three such investments I’d buy for my portfolio today. 

Recovery penny stocks

The first two equities on my list are recovery plays. The first is new and used car dealer Pendragon (LSE: PDG). Although it saw sales plunge last year, they’ve bounced back in the first half of 2021. As the demand for new vehicles is constrained, second-hand car prices have jumped.

Thanks to this environment, the company reported a record underlying profit before tax of £35.1m in the first half of this financial year. Sales increased 63% on a like-for-like basis. 

Nevertheless, despite this growth, shares in Pendragon are trading around 30% below their 2019 high. I think this could present an opportunity. 

The other company I’d buy for my portfolio of penny stocks as a recovery investment is Stagecoach (LSE: SGC). This public transport company has effectively been living off state handouts for the past 18 months.

Without financial support such as the £227m funding pot for bus services announced by the Department of Transport at the beginning of July, the enterprise might well have collapsed last year. 

It’ll take some time for its recovery to gain traction, but I believe demand for public transport will only increase in the long term. Challenges such as climate change and the increasing cost of owning a private vehicle may drive consumers onto public transport, benefiting companies like Stagecoach. 

The main risk both Pendragon and Stagecoach face is the threat of further disruption caused by coronavirus. If this happens, both of these companies may have to revisit their growth projections. As such, I’m not going to take their growth for granted. 

Still, I’d buy both for my portfolio of penny stocks today.

Storied retailer

The final company I’d buy is Hornby (LSE: HRN). The international models and collectables group has had a rough few years. As the company struggled to rekindle growth, the pandemic arrived, decimating sales. 

Annual revenues have declined from more than £50m years ago to around £37m in its latest financial year. At the same time, profits have plunged. 

However, according to its latest trading update, the group’s starting to experience a recovery. Sales are returning to pre-Covid levels, and its order book is “substantially higher than a year ago.” It’s also bolstered its supply chain by acquiring LCD Enterprises Limited, which supplies diecast model vehicles and railway products. 

Although I’d buy Hornby as a turnaround opportunity for my portfolio of penny stocks, I should point out that the company’s turnaround isn’t guaranteed. It could struggle in the increasingly competitive retail environment, and sales and profits may continue to slide. 

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I’d buy them for big share price gains in the near term but hold them for years into the future. Give me a few minutes to explain why.

Full steam ahead

The reopening of the UK economy means Hornby (LSE: HRN) can expect demand for its train sets and model cars to pick up considerably. At least that’s my view as shops steadily reopen and consumers feel confident enough to start spending again. Signs of improvement are already beginning to emerge, with Hornby noting “very encouraging” sales in the three months to March.

No doubt the company is also benefiting from the emergence of new ‘hobbyists’ during Covid-19 lockdowns. Beware though, the penny stock markets are notoriously competitive and it will have to work hard to keep revenues rolling in. Demand for its miniatures might also waver if alternative hobbies soar in popularity.

Another penny stock for the hobbies boom

TheWorks.co.uk (LSE: WRKS) is another UK penny stock that’ll benefit from non-essential retailers  reopening their doors. This particular retailer sells a wide variety of goods, from arts and crafts products and books to stationery, toys and games. And, critically, the company sells its wares at low price points, putting it bang in the middle of the fast-growing value retail segment.

There are other reasons I like TheWorks.co.uk too. It stands to gain from the resurgence in arts and crafts following the Covid-19 pandemic. It has also relaunched its web platform and boosted fulfilment capacity to keep online sales booming (these grew 70% in the 11 weeks to 10 January). That said, the business still sources huge amounts of its sales through the traditional bricks-and-mortar channel. So it could lose out near-term as the e-commerce boom continues.

Zip-zip-hooray

A recovery in consumer spending isn’t the only reason why Coats Group (LSE: COA) is, in my opinion, another great reopening stock. With people returning to their workplaces, the pub, the park and everywhere in between en masse, clothing sales in particular look set to take off again. Thus, this penny stock can expect demand for its threads, yarns and trims to fly. Coats describes itself as “world’s leading industrial thread company” while it’s also at the top table of zip manufacturers too. This puts it in the box seat to enjoy the broad recovery in fashion sales.

A word of warning, though. The company faces increasing competition from China (such as SBS in the zips market) which threatens to derail long-term profits growth.

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The stock looked expensive to me back then — but I wasn’t expecting Monday’s sales warning, which wiped around 25% off the group’s share price. A mix of supply issues and lower order levels than expected mean that revenue will rise by just 1%-2% this year, against previous guidance of 4%.

As the dust starts to settle, the shares have steadied at about 212p. But despite this modest rebound, ConvaTec stock is now cheaper than at any time since its flotation in late 2016. The shares now trade on a 2017 forecast P/E of about 15, falling to a P/E of 13 for 2018.

A buying opportunity?

I believe it’s probably too soon to buy.

Management is still “reviewing the financial implications for growth and margins” in 2018. Chief executive Paul Moraviec has promised “further guidance” early next year, but the phrasing of his comments suggests to me that bad news is likely.

It’s also worth noting that ConvaTec is yet another example of an IPO that’s disappointed the market during its first year of public trading. In my view, it pays to be suspicious about recent flotations at the moment. Are the outgoing owners simply looking to cash in ahead of tougher times?

In ConvaTec’s case, I’ll be looking for clear evidence of stable profits and further debt reduction before considering an investment. For now, I’m going to stay away.

A smoother ride?

Troubled modelling and collectibles group Hornby (LSE: HRN) issued another profit warning this morning. The news follows the appointment of new chief executive Lyndon Davies. Mr Davies is the chairman and controlling shareholder of the Oxford Diecast model and collectible business.

Following his initial review of the business, Mr Davies has decided that to protect the value of the group’s brands, it will no longer offer discounted stock to volume buyers. Although the company had already warned shareholders that full-year results were likely to be below expectations, today’s statement confirms that there will be “a material impact on profitability” this year as a result of lower sales.

Time to buy?

At 32p, Hornby’s shares currently trade nearly 10% below their book value of 35p per share. I admit that the long heritage of brands such as Hornby, Airfix and Scalextric is a potential attraction. But I think investors need to ask if the stock is really cheap enough to be a compelling buy.

The last time this group reported a profit was in 2012, when it generated an operating margin of 7.4%. If this had been applied to last year’s sales of £47m, I estimate that the company might have reported earnings of about 3p per share, assuming a 25% tax rate.

That would give a P/E of 10.6 at the current share price of 32p, which seems fair. My concern is that Hornby is only expected to report earnings of 1.3p per share in 2018/19, giving a forecast P/E of 26.

In my view, a reasonable recovery is already priced into the stock. I’m not sure the shares are cheap enough to be a great turnaround buy.

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Broken model

Former chief executive Richard Ames resigned in February 2016 following the third profit warning in five months while chairman Roger Canham resigned today with immediate effect after Phoenix Asset Management Partners, of whom he is a director, launched a mandatory 32.375p a share offer for the shares in the model train set maker it doesn’t already own, valuing it at £27.4m. Hornby has been concentrating on streamlining costs and stabilising its existing brands, and although it scrapped its dividend again today it claims to have now completed the first stage of its turnaround plan.

Picking up steam

The headline numbers don’t look great, with revenue falling from £55.8m in 2016 to £47.4m, while the underlying loss before tax widened from £5.7m to £6.3m. However, the direction of travel looks more positive, with the reported loss before tax falling from £13.5m to £9.5m. Hornby incurred exceptional items of £3.3m, but that was down from £7.9m in 2016.

On 31 March, net cash stood at £1.5m, a big improvement on last year’s £7.2m. Hornby has been streamlining its operating model, reducing costs, supporting key UK brands, improving cash generation and focusing on profitable products to build margins, which now stand at 40%. City analysts say management can turn this year’s underlying loss into a pre-tax profit of £500,000 in the year to 31 March 2018. However, revenue growth looks minimal, and right now Hornby looks like a slow train coming.

Minds games

Intellectual property firm Allied Minds (LSE: ALM) has also been through a tough time, its share price down 51% over the past year, and 75% over two years. Its shares fell off a cliff in April after it announced a $146m writedown on the value of seven of its subsidiaries, which it is now looking to sell, transfer or liquidate.

There is nothing wrong with closing down struggling subsidiaries to focus on the successes but investors felt aggrieved having being asked to pump in £64m in fresh equity just three months earlier. Top fund manager Neil Woodford, who owns 30% of the university and government technology commercialisation specialist, forked out £15m and is publicly standing by his controversial pick, but others are rightly more wary.

Scary stuff

You don’t need me to tell you that private equity is a risky business and you might agree with chief executive Jill Smith’s view that these “necessary” measures place Allied Minds in a stronger position to deliver returns to shareholders through accelerated commercialisation, monetisation and portfolio growth. 

This could be a brave recovery play. Woodford certainly hopes so, but Allied Minds looks far too risky for me. It looks on course to deliver its fifth consecutive year of pre-tax losses at around £92m in the calendar year 2017, with a forecast rise to £96.71m in 2018. Obviously, the company is focused on investing in assets right now, the problem is that delivery has been non-existent. Neil Woodford is a far braver man than I am.

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Hornby notified its shareholders today that the group expects to meet its full-year forecasts as its multi-year restructuring programme remains on track. However, while the company is confident that it will meet full-year City expectations, management is also warning that the group will continue to be lossmaking while it progresses through its “transition.” 

And the City forecasts it expects to meet are hardly anything to get excited about. Analysts have pencilled-in a pre-tax loss of £6.3m for the year ending 31 March and earnings per share of minus 5.9p. Hornby’s management expects revenue to decline by 20%-25% year-on-year. According to today’s trading update, group revenue was down 25% over the Christmas period, with UK revenue falling 21% due to the move by the group to slim its product range and exit concession arrangements in the UK.

Still, despite falling revenues, I believe Hornby’s turnaround has now taken hold, and over the next 12 months, the company will be able to prove to its investors that it’s back on track. 

A different business

Hornby will never be the toy giant it once was. The world has changed considerably since it dominated the toy scene and it’s highly unlikely toy tastes will change back to the way they were any time soon. Nonetheless, there’s still demand for Hornby’s products, albeit from a smaller base. 

Over the past few years, Hornby has been struggling to adapt to the new trading environment, but it now looks as if the company has found its feet. By lowering its cost base and focusing on a smaller audience, Hornby might be able to replicate the same success as Games Workshop, which is focused on its die-hard hobby fans who are willing to pay more for less.  As a result, Games Workshop is a cash cow. The shares yield 6.2% and have gained 60% in the past 12 months. 

A different model 

Hornby’s peer, Character (LSE: CCT) has been able to succeed where Hornby has failed thanks to innovation. New toy lines have helped the group expand revenue 20% over the past year and City analysts are expecting the company to report pre-tax profit growth of 25% over the next two years. But it doesn’t look as if the market is convinced Character can keep this growth up. Shares in the company currently trade at an undemanding forward P/E of 10.6 and yield 3.2%. 

As Hornby’s toys are relatively niche compared to Character’s multiple toy lines, it’s not likely the company will ever be able to replicate Character’s success. However, if the firm concentrates on its most important, and profitable customers, I believe it can return to profitability and generate lucrative returns for investors.  

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Lakehouse

Shares in asset and energy support services company Lakehouse (LSE: LAKE) have fallen by around 7% today after it released a somewhat mixed trading update. Its Regeneration division continues to create challenges for the business, with Lakehouse now anticipating that there will be further writedowns during the current financial year as it seeks to close out issues with contract settlements. This is expected to have an adverse impact of £4m on its full-year results.

However, Lakehouse is also experiencing strong underling trading elsewhere in its business and today announced a £37m contract win from Scottish Power to install domestic smart meters across Scotland, Wales and North West England. And with Lakehouse expected to return to double-digit bottom-line growth next year, its shares trade on a price-to-earnings growth (PEG) ratio of just 0.4. This indicates that while investor sentiment may be weak at the moment, there’s good value on offer for long-term investors.

Hornby

Despite releasing no significant news today, shares in Hornby (LSE: HRN) have risen by 7%. However, they’re still down by 67% year-to-date as the financial strength of the hobby products producer has been called into question by some investors. However, with Hornby having undertaken a successful placing to raise £8m in recent weeks, its balance sheet is now much stronger than it was previously and this lowers its risk profile considerably.

Furthermore, the placing should allow Hornby to execute its new business strategy. This includes a major cost reduction plan as well as a more focused product range. While Hornby intends to keep its main brands, it will also streamline its European operating model and seek to exit unprofitable concessions. Although this strategy seems sound and could work, Hornby continues to offer a very uncertain outlook and therefore it may be prudent to await evidence of a successful turnaround before buying it.

Proton Power Systems

Rising by 86% today is Clean Tech total power solution provider Proton Power Systems (LSE: PPS). It has today announced a major restructuring due to it seeing major growth ahead in the Clean Tech market, with its business set to be split into three segments. These are Stationary business, Mobile business and Maritime business, with Proton expecting to deliver year-on-year revenue streams as the commercialisation of its core technology is now realised.

Furthermore, Proton is on track to increase its sales by 250% this year and due to it seeing proof that the fuel cell technology it offers is commercially attractive to customers, Proton’s long-term outlook is now much more positive. Certainly, it remains a relatively high-risk play, but with clean energy becoming more in-demand and Proton now having a clear structure through which to take advantage of this, now could be a good time for less risk-averse investors to buy it.

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No worse than expected

The model toy and train company announced its annual results this morning, alongside details of an rescue share placing. Hornby will raise £8m at 27p per share. That’s an impressively small 15% discount to Tuesday’s closing price of 32p.

However, Hornby warned the market this morning that the company’s future may be in doubt if shareholders don’t approve the placing. A new £10m lending facility that’s needed to refinance Hornby’s net debt of £7.2m won’t be approved if the placing doesn’t go ahead.

Last year’s results were no worse than expected. Revenue fell by 4% to £55.8m and the firm made an underlying pre-tax loss of £5.7m. Hornby suffered badly with IT and supply chain problems last year, which the firm says contributed to poor sales.

Under the guidance of new chief executive Steve Cooke, Hornby now plans to cut its product range by 40% and focus on core brands and markets. The firm also plans to make significant cost savings and deal with a sizeable overhang of unsold stock from last year.

In my view, big gains are possible — but significant risks remain.

Lower costs for key oil project

Shares in North Sea oil and gas producer Ithaca Energy (LSE: IAE) edged higher on Wednesday, after the firm said that operating costs for its flagship Greater Stella Area (GSA) project would be lower than expected.

The expected savings are the result of Ithaca being given an opportunity to use a pipeline connection that’s been relinquished by another operator. First production from the Stella field is expected in late September 2016. Exporting oil by pipeline rather than tanker will save cash when the pipeline connection is completed in 2017.

Ithaca shares have risen by 132% so far this year and are no longer an obvious bargain. In particular, I’m concerned about the firm’s $630m net debt. However, Ithaca has some hedging in place through to mid-2017.

The firm also expects operating costs to fall to $20/boe when Stella production starts. This should allow the firm to start repaying its debt by the end of this year. In my opinion, Ithaca could deliver further gains for shareholders.

Woodford is backing this stock

Unlike Hornby and Ithaca, Game Digital (LSE: GMD) is already profitable. However, this hasn’t stopped the group’s share price from falling by 70% over the last year. A profit warning just before Christmas did most of the damage, but Game Digital isn’t a basket case.

Game is now expected to report earnings of 9.7p per share for the year ending 25 July. This puts the stock on a forecast P/E of 8.2, with a prospective dividend yield of 6.4%.

The firm’s big strength is that it has plenty of cash. Net cash was reported as being £120m at the start of January. Although this probably represents a seasonal high, the group’s ability to generate free cash flow is significant. Results for the first half of this year suggest that the dividend should be comfortably covered by free cash flow.

Neil Woodford’s funds own a slice of Game Digital, and I can see why. If trading stabilises, this company has the potential to generate a generous stream of cash for shareholders.

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