Small-cap stocks like these can experience spectacular earnings growth, delivering large capital gains in the process. Yet this high-reward strategy also comes with significant risks.

Penny stocks can be more vulnerable to collapse if industry or economic conditions turn sour. Share price volatility is also common.

This is why purchasing small caps with low valuations can be a good idea. Low price-to-earnings (P/E) ratios, for instance, provide a cushion that can limit price falls if news flow worsens.

These two penny stocks look cheap on paper. Which is the best one for investors to consider?

Petra Diamonds

Petra Diamonds (LSE:PDL) hasn’t had the best of it in recent years. Slumping stone prices, production issues, and balance sheet woes have caused its share price to collapse and remain in the gutter.

City analysts expect it to remain loss-making this financial year (to June 2025). But a return to growth in fiscal 2026 means the miner trades on a P/E ratio of just three times.

That’s dirt-cheap on paper, as is Petra’s price-to-book (P/B) ratio. At 0.2, this is some distance below the watermark of 1, indicating it trades at a big discount to the value of its assets.

Could now be the time to buy in?

The company’s planning to boost output at its Finsch and Cullinan mines in South Africa over the next several years at it plots a comeback. It’s hoping to produce between 3.4m and 3.7m carats by 2028.

But the risks to a recovery are significant, and they’re not just operational. Diamond prices may remain weak depending on economic conditions, while synthetic stones also continue growing in popularity.

Added to this, Petra still has a lot of debt on its books. Net debt was $285m as of September, in fact.

Petra’s average annual return over the past decade is a jaw-dropping -42.5%. I think investors should consider avoiding it.

Pan African Resources

Pan African Resources (LSE:PAF) also looks dirt cheap on paper. Despite the bright outlook for gold prices, and its Mogale Tailings Retreatment (MTR) project coming on stream, it continues to command a low valuation.

For this financial year (also to June 2025), the gold miner trades on a P/E ratio of 6.4 times, a reading that drops to 4.5 times for fiscal 2026.

In addition to this, the price-to-earnings growth (PEG) ratio on Pan African shares is 0.1 for both the next two financial years. A sub-1 reading indicates that a stock is undervalued.

Like Petra, revenues are highly sensitive to the commodity it produces. A sudden drop in precious metal prices could destroy current earnings projections.

But for the moment, the price picture for gold looks upbeat. Increasing economic uncertainty, falling interest rates, and rising geopolitical tension are all supporting safe-haven gold.

And new production at MTR is helping Pan African capitalise on this favourable environment.

Investing £500 today

With share price gains and dividends combined, the company’s delivered a healthy average annual return of 11.8% during the last decade.

Past performance isn’t a reliable guide to the future. But if this penny stock can continue that exceptional run, a £500 investment today — blended with a £500 monthly investment for the next 10 years — would eventually turn into £115,295.

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So, after the recent fall back, is there an opportunity to add the company to my portfolio?

Volatile financials

When I invest in a business, I like one that has a proven model of profitability. That does not mean that it needs to be profitable every year – but massive swings in profitability concern me.

That is one red flag that strikes me immediately about Petra Diamonds. Last year it made a profit of $197m. But the year before that, it lost $223m. The year before that, the loss was even larger, at $258m.

Those are big numbers – and in the wrong colour of ink for my liking.

Partly that reflects the volatile nature of the diamond market. Lately, things have been moving in a positive direction. In its most recent financial year, for example, the company sold 11% fewer carats of diamonds. But revenue from diamond sales still grew 44%. That highlights how the unpredictable nature of diamond pricing means a company can earn more money by selling less than before. But that can go the other way too. With its relatively undiversified business, Petra is heavily exposed to swings in the price of diamonds. Such price swings are outside the company’s control. However, they could affect the Petra Diamonds share price.

Future prospects

This month, the company’s chief executive said that this year’s performance “completes the successful turnaround of Petra”. But one swallow does not a summer make and until very recently the company was still heavily loss-making.

After a like-for-like increase in the rough diamond price of 43% in the year to the end of June, what comes next? The company remains upbeat about the long-term balance between demand and supply for diamonds, which could help support its pricing. But it recognised that “there may be some volatility in the short to medium term”.

I see a risk that, with many countries in recession or heading into one soon, demand for diamonds will fall. Quite a lot of diamond sales are discretionary costly purchases that may be postponed or scaled down in economically tough times. Even if pricing can be maintained – which is never certain – lower sales volumes would likely lead to lower profits.

On the other hand, the company has been focussed on improving efficiency. That could help boost profit margins. But if demand for diamonds falls sharply, I expect it to be bad news for Petra.

The Petra Diamonds share price does not attract me

The Petra Diamonds share price is in pennies. With a market capitalisation of under £200m, the most recent earnings statement makes the price-to-earnings ratio of under one look incredibly cheap. But the shares do not tempt me. I have no intention of buying them for my portfolio.

The company’s performance is almost wholly tied to demand and pricing for a single item, over which it has little if any control. That is not an attractive business model in my opinion. Just because the company swung into profit last year does not change that.

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There’s been a glimmer of light for the penny stock in more recent months. Precious stones prices have risen again as the economic recovery from 2020’s lows has kicked in. Fresh fundraising earlier this year, allied with an improvement on the production front, has also raised optimism over Petra Diamonds’ long-term future.

I’m still yet to be convinced to buy this stock however. I’m not just worried about how the recent resurgence of Covid-19 cases could impact the diamond market again. And especially what this would mean for Petra Diamonds, given that its balance sheet is still looking petty fragile. The patchy long-term outlook for the natural diamond market also gives me reason to be concerned.

Demand for lab-grown stones has been steadily increasing in recent years. And researchers at Statista expect the market to explode over the next decade. They reckon market volumes will stand at 19.2m carats in 2030. That compares with 6.2m last year and 1m carats in 2010.

It’s also possible that investor interest in Petra Diamonds’ shares will fall as the importance of responsible investing grows. Concerns over worker conditions in South African mines has, along with price, driven the popularity boom for artificial stones. These rising ethical concerns are something that could also drag the Petra Diamonds share price lower over the next decade. Today, the company trades at 1.7p per share.  

A better penny stock to buy

I’d much rather buy UK healthcare share Shield Therapeutics (LSE: STX) for my shares portfolio. This penny stock trades at 45p per share, and I think it could soar in value as the problem of iron deficiency explodes.

Shield Therapeutics’ leading product is Feraccru/Accrufer, a treatment for iron deficiency anaemia. Sales of the drug are rocketing in Europe, with volumes ballooning 51% in the first half of 2021 versus the final six months of last year.

Encouragingly, the pharma firm launched the product in the US on 1 July after getting regulatory approval there. And China has potentially opened the door to the drug being released in that gigantic growth market too, having recently received approved of a new drug application for Feraccru.

Remember that regulatory approval is, of course, by no means guaranteed in China (as is the case elsewhere). Thus, all the hard work Shield Therapeutics has carried out could fail to meet expectations. Still, I’m encouraged by the thumbs ups the penny stock’s product has received from European and American regulators.

I think the company’s work to treat a major global health problem could reap huge rewards.

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Late July’s release showed revenues at the penny stock jump 38% year-on-year during the 12 months to June, to $406.9m. This was helped by a sharp uptick in realised diamond prices during the final quarter. These rose around 5.7% from the prior three months.

Petra’s sales were also helped by strong sales of ‘exceptional stones’ in 2021. These precious rocks (which are valued at $5m, or above, apiece) accounted for $60.2m of total turnover last year, the highest annual contribution on record.

Petra production tipped to rise

Promising news on the production front also lifted the PDL share price higher in late July. Petra Diamonds hauled 3.24m carats of diamonds out of African soil in fiscal 2021. This was down from the 3.59m carats produced in the prior 12 months. Lower production at its Finsch and Koffiefontein assets, and care and maintenance work at Williamson, more than offset record production of 1.94m carats at its flagship Cullinan project.

However, Petra has said full-year output will likely rise to between 3.3m and 3.6m carats in financial 2022. This is thanks, in part, to plans to restart Williamson again this quarter.

Time to buy this penny stock?

There’s no doubt that Petra Diamonds is in much better shape than it was at the turn of the year. Massive debt restructuring in March has given it some much-needed breathing space after its battered balance sheet forced it to (albeit temporarily) put itself up for sale last summer.

As I also said, the diamond market is also showing much-needed green shoots of recovery. And finally, penny stock Petra continues to pull those exceptional stones out of the ground. The firm sold a 39.34-carat blue diamond for a cool $40.2m in the middle of July. And in recent days, it’s hauled a 342.92-carat white diamond from the bowels of Cullinan.

All that being said, I still won’t be buying Petra shares for my own stocks portfolio just yet. As a long-term UK share investor, I worry about the threat posed to the company by lab-grown diamonds. Not only do these synthetic stones continue to improve in quality and fall in price. But rising ethical concerns from consumers (as illustrated by Pandora’s decision to stop selling natural stones) also pose a growing problem.

I’m also concerned about the penny stock’s balance sheet should it encounter more profits-crushing production problems. The mining industry is plagued with danger but Petra has particularly worrying form in this arena in recent years.

I’ll be keeping an eye on the company, sure. But, for the time being, I’d rather buy other lower-risk stocks for my shares portfolio.

The post Is penny stock Petra Diamonds a top buy? appeared first on The Motley Fool UK.

Still no sparkle

Followers of Petra Diamonds (LSE: PDL) will know this UK penny share has been in the wars in recent years. Diamond prices have been under pressure on a mix of plentiful supply and sinking demand, the latter issue worsening significantly following the Covid-19 outbreak.

Revenues at Petra Diamonds have also been whacked by a raft of production problems at its South African mines, pushing the business close to collapse.

But news flow from Petra has been sunnier in recent weeks. And an improvement in diamond values helped turnover rise 16% in the three months to March. Some analysts think that stone prices will continue to rise too, as improving economic conditions drive jewellery demand.

News that demand for synthetic diamonds has also slowed is another good sign for this penny stock. Overall though, I think Petra Diamond’s gigantic debt pile, its history of production problems, and the long-term threat posed by lab-grown diamonds make this UK share a risk too far.

A safer penny stock

I try to make investing in shares as stress-free an experience as possible. And this is why I think Premier Foods (LSE: PFD) is an ideal penny stock for investors like me.

Firstly, food production is one of the most defensive sectors out there. We all need to eat, regardless of what social, economic or political meltdown might be raging outside out windows, right?

Secondly, Premier Foods owns some of best-loved brands out there, like Mr Kipling cakes and Homepride and Sharwoods cooking sauces. This gives it the confidence to lift prices to keep growing margins even when consumer spending power is under pressure.

I’d buy this UK share despite the threat of changing pricing and promotional policies by supermarkets can pose. This can have a significant impact on demand for its products and, as a consequence, earnings growth.

A gaming great

In a recent piece I explained how the technological revolution creates huge opportunities for Ocean Outdoors. This is a company whose outdoor screens allow companies to use visual tricks to reach their customers.

In the same vein I think fellow penny stock Bidstack (LSE: BIDS) could be another top UK share to buy. This UK tech share provides a platform for advertisers to plaster pictures and their product logos into video games. It’s a market which has the potential to grow strongly as the global gaming market explodes.

Analysts at Grand View Research reckon the video games industry will grow at a compound annual growth rate of 12.9% through to 2027. Be aware though, that people’s preferences can change rapidly. The gaming boom of the past decade may run out of steam and Bidstack’s profits outlook could take a serious hit.

The post Are these 3 of the best UK penny stocks to buy right now? appeared first on The Motley Fool UK.

Okay, pre-tax losses narrowed to $13.2m in the first fiscal half from $20.7m a year earlier. But this was the only bright spot in an otherwise terrible release. Production edged 3% higher in the six months to December, to 2.07m carats. But this was worse than expected, due to production problems at its flagship Cullinan mine and Williamson asset.

Troubles at its South African and Tanzanian complexes weren’t the main focus of investor concern, however. News of persisting pressure on diamond prices sent Petra’s share value into a fresh tailspin. Rough diamond prices toppled around 10% year-on-year between July and December, it said. And, consequently, revenues at the digger slipped 6% to $193.9m.

Debt problems

The trading environment has been under pressure of late because of abundant supply and faltering demand, exacerbated by a slowing global economy and trade wars between the world’s largest two stones markets, the US and China.

The outbreak of the coronavirus in Asia has given Petra even more to worry about. It’s a development that the mining play can ill afford given the havoc that a weak diamond market is already wreaking on its balance sheet. Net debt at the small-cap keeps on ballooning and rose to $596.4m as of December. This was up 7% from the end of 2018.

Indeed, this fresh problem has left the business scrambling to plug holes. It said that “in light of the impact of the weakness in the diamond market on the group’s operating results and cash flow position, the group will continue closely monitoring and managing its liquidity risk and will have further discussions with its lender group regarding further covenant resets and/or waiver.”

It added: “Additional waivers are likely to be required for the June and December 2020 measurement periods” based on its current forecasts. Petra also “continues to assess its strategic options in relation to the maturity of its $650m loan notes in May 2022.”

To buy or not to buy

It’s no shock that City analysts expect revenues and losses at Petra to both worsen in the current fiscal year to June. But could the digger prove a decent turnaround prospect?

The number crunchers expect the company to bounce back into the black in fiscal 2021. And, at current prices, Petra changes hands on an undemanding P/E ratio of 13.2 times for that year.

I’m certainly not tempted to buy shares in the company. Not for a second. It might not be expensive, but Petra isn’t exactly cheap. I’d expect it to be trading for next-to-nothing given the precarious state of its balance sheet and the added pressure that the coronavirus has exerted onto an already-battered diamonds market.

It’s a share that should be avoided at all costs right now.

The post Could this be the best turnaround stock of 2020? appeared first on The Motley Fool UK.

Investors have been desperate for something to cheer and while they’ve had to wait for it, some auction news from one of its competitors is something that warrants no little end-of-year celebration. According to Anglo American rough diamond sales at its De Beers unit’s 10th sales cycle of 2019 rose to $425m from $400m in the previous auction, proving that the substantial increase in November wasn’t an anomaly.

More market struggles in 2020?

But don’t get too excited, I say. In that 10th cycle, sales were still down significantly from the $544m that De Beers had raised a year earlier. And many market commentators expect trading to remain a struggle next year.

The boffins over at Bain & Company, for example, reckon that although some of the inventory backlog should start to be cleared in the new year, “the industry is not likely to fully recover in 2020 because of ongoing supply-demand inequality and limited growth of financing options for midstream players.”

It adds that “major diamond producers have not announced substantial mining plan cuts, and we do not expect significant retail growth in 2020, as consumers brace for a global recession.”

Too much trouble

The body expects rough diamond sales to have sunk 25% in 2019 due to weak consumer confidence and geopolitical uncertainty whacking sales in the critical US and Chinese markets. And reflecting these difficulties in the market, City analysts expect losses to swell at Petra in the current year (to June 2020). And it’ll take a braver man than me to predict that any improvement in the bottom line could be in the offing.

Even though Bain & Company says that “the industry will have a stronger chance to rebalance and grow in 2021,” buying Petra shares is not a chance I’m willing to take. Don’t forget about the massive production problems the firm has been experiencing of late, not to mention the eye-popping amount of debt the firm has to wrestle with before that hoped-for upswing in the market comes alone.

The business had to halt production across its South African assets earlier this month, reflecting a request by power supplier Eskom for the digger to reduce its electricity load, in the latest misfortune to hit its operations. Production is once again running at normal levels, but the episode underlines the risky nature of investing in commodities producers. All things considered, I think that Petra carries far too much risk today, and I for one would much rather use my hard-earned pennies to invest elsewhere.

The post This share has crashed 77% in 2019! Is it now a brilliant dip buy for your ISA? appeared first on The Motley Fool UK.

I’m not convinced, however. Not by a long chalk. Investor sentiment has improved in part on news in mid-November that Petra had sold a rare 20.08 carat blue diamond recovered from its Cullinan mine in South Africa. It was offloaded for a cool $14.9m, in line with expectations, and gave a boost to the company’s debt-laden balance sheet (as of September the FTSE 250 firm had a whopping $592.8m worth of net debt on the books, up from $564.8m just three months earlier).

False dawn?

But don’t get too excited by the company’s recent sales success, I say. The cooling global economy continues to play havoc with diamond prices, as a recent de Beers auction in November showed (according to Bloomberg, diamonds there went under the gavel for 5% less than they did a year earlier).

The consequence of lower stone prices and falling volumes caused revenues at Petra to tank 23% in the three months to September, to $61.6m, and a 4% drop in prices of its diamonds in the quarter show that the market remains some way off recovery.

City analysts, unsurprisingly, expect Petra to remain loss-making in the current year (to June 2020). And it’s difficult to see just how the business will flip back into profit any time soon as the geopolitical and macroeconomic stresses smacking the global economy steadily worsen.

I continue to believe that this particular raw materials giant should be given an extremely wide berth, particularly given the eye-popping scale of its debt levels.

A better FTSE 100 buy!

I believe that share pickers would be much better off using any investment cash to buy shares in Associated British Foods (LSE: ABF) instead. The FTSE 100 operator’s share price has risen 15% over the last month, meaning that its has ballooned by almost a quarter in value since the start of 2019.

The Primark owner has flown on the back of some scintillating full-year results released at the start of November. Back then it declared that revenues and adjusted pre-tax profits had both risen 2% in the financial year ending September 2019, to £15.8b and £1.41b respectively, a result driven by particular strength at its grocery unit and its discount retail division.

And there’s clearly plenty of reason to be excited in the current fiscal year as Primark’s expansion plan clicks through the gears, and as tough economic conditions across mainland Europe and the UK boost the popularity of its cut-price clothing lines.

In fact, City analysts expect earnings growth at ABF to accelerate to 8% in fiscal 2020, leaving it trading on a forward P/E ratio of 17.1 times. I consider this to be brilliant value considering the soaring popularity of Primark all over the globe and one which makes the business a brilliant buy for 2020 and beyond.

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For some braver share pickers, Petra Diamonds could be seen as an attractive punt at current prices. Boasting a forward P/E ratio of just 3.9 times, it could be considered a snip in relation to its predicted near-term earnings trajectory, as does a corresponding PEG reading of 0.1.

But what on Earth could prompt anyone to buy into the business right now? The promise of rebounding diamond prices? Of course.

Near-term worries rise

But Petra has found itself in the doghouse with market makers, in part because of wretched diamond demand in recent years. Soft stones demand in China and high inventories of polished items are battering the sector and, according to the firm’s most recent financials, revenues sank a lacklustre 7% in the three months to March, to $135.2m. That’s a reversal driven by a 6% slump in volumes to 1.06m carats.

Have conditions picked up since then? Not if trading at Anglo American’s De Beers unit is anything to go by. The firm advised this week sales in its fifth cycle had plummeted to $390m, from $591m a year earlier.

It’s unlikely prices will improve in the near term either, given the impact US-Chinese trade wars have had on the already-slowing economy in the Far East — battles which threaten to persist despite hopes of a breakthrough at this weekend’s G20 summit. And let’s not forget the prospect of a downswing in the solid North American market amid signs of growing economic stress there.

So what’s the score?

On the other hand, Petra and its peers could be considered attractive investments for patient investors amid hopes of recovering stones prices from the start of the next decade.  

Diamond market expert Paul Zimnisky recently told UBS that natural diamond production will slip 12% in the five years to 2022 as existing mine supply is depleted and old assets are shuttered, factors that could give prices a much-needed leg-up. He also noted diamond demand is growing while voicing doubts over the impact of the man-made segment on natural product demand too. In particular, he downplays the possible disruption that synthetic stones will cause in the luxury jewellery market.

So what should investors do? Take a ride with Petra in the hope of improving supply/demand values in the next few years? Certainly not, I would argue.

Whether or not an improvement in the diamond market’s fundamentals eventually materialises, the risks to the company remain formidable.

Reasons to be fearful? The prospect of fresh currency headwinds should the slowing global economy hit the South African Rand. More mining and shipment problems in South Africa and Tanzania. And, of course, an elevated net debt pile which still sat north of $550m as of March.

It’s quite likely that fresh financials slated for 22 July will release some fresh horrors, given recent newsflow. Thus the chances of additional share prices drops are high. For this reason, I think Petra remains best avoided and quite possibly remain so for the considerable future.

The post Is this hated FTSE 250 stock actually a brilliant buy for July? appeared first on The Motley Fool UK.

At the time of writing, the stock trades at a forward P/E of just 7.4 and an enterprise value-to-EBITDA ratio (EV/EBITDA) of 4.4. To put this into some perspective, the rest of the market trades at a median EV/EBITDA ratio of 10.9 and the global metals and mining sector commands a multiple of 7.1.

However, the question we have to answer is, why is Evraz so cheap in the first place?

What’s the deal? 

I think there are three main answers to this critical question. First of all, Evraz is a Russian headquartered business, so there’s a bit of country risk here.

Second, it operates in a highly cyclical industry where any number of factors can decimate profits. Indeed, the company has only been profitable for the past two years, and between 2013 and 2016 it racked up nearly $2.5bn in net losses.

And third, the group has quite a bit of debt. Net debt as a percentage of equity was 211% at the end of 2018. On this last point, the company is making progress. It reduced net debt from $6.4bn to $3.5bn between 2013 and 2018.

Evraz has been able to reduce debt so quickly because it is throwing off cash. Free cash flow has totalled $8.5bn over the past six years, which is why the company was able to distribute $1.6bn to shareholders via dividends last year.

This cash generation doesn’t entirely make up for the company’s other faults, but in my opinion, it does show how resilient this business is. Some investors might not be comfortable investing in a business that is so exposed to Russia, but I think a lot of this risk is already reflected in Evraz’s discount valuation and a dividend yield of 8.8%. So, if you’re looking for value stocks, it might be worth considering Evraz for your portfolio.

Too cheap to pass up? 

Another value stock that I think might be worth your research time is Petra Diamonds (LSE: PDL).

Petra is very similar to Evraz, in my opinion, because this company is also struggling with a high debt load and volatile earnings. But once again, I think the majority of this risk is already reflected in the stock’s valuation. It is dealing at a forward P/E of just 3.7 at the time of writing and EV/EBITDA ratio of 4.2. 

That being said, I believe the business does deserve to trade at a discount to the rest of its sector because earnings are falling. Today, the company announced a 7% increase in fiscal third-quarter revenue due to a 6% fall in sales volumes. Net debt did fall marginally during the stated period (down 1% quarter-on-quarter), but this still leaves the business with a net gearing ratio of 120%.

These figures are not that impressive, but as I mentioned above, I think Petra’s current share price already reflects most of the pessimism surrounding a business and even a small uptick in expectations might lead to a significant re-rating of the stock. With this being the case, it might be an attractive investment for risk-tolerant value investors.

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