Smaller businesses tend to be riskier than their larger peers. As such, penny stocks can produce large profits for investors, but they can also incur significant losses. 

Still, I am comfortable with the level of risk involved with buying these equities. Here are two penny stocks I believe have explosive growth potential. 

Penny stocks for growth 

Safestyle (LSE: SFE) is a leading retailer and manufacturer of PVCu replacement windows and doors. And like all construction-related companies, the group is currently experiencing a boom in demand.

According to the company’s interim results for the first half of 2021, revenues increased 73% year-on-year and by 13% compared to 2019. Gross profit also rose 41% compared to 2019, as the group’s operating profit margin increased from 26% to 32%. 

I think the company is now primed for explosive growth because it has used the past 18 months to strengthen its balance sheet. At the end of the first half, it had £14.4m of net cash, more than double the level reported at the end of the first half of 2020. 

With a strong balance sheet in place, the company’s growth initiatives are well-funded. It has opened two new depots over the past 12 months to improve operational coverage and reduce travelling time. It is also investing more in modernising its brand and salesforce. 

Some challenges the group may face as we advance include housing market disruption. This could reduce demand for its services. Rising costs and a lack of staff may also reduce sales. 

Despite these risks and challenges, I would buy Safestyle for my portfolio today. 

Green energy

In my opinion, one of the most exciting penny stocks on the market is AFC Energy (LSE: AFC). This company is a leading provider of alkaline fuel cells for the generation of clean energy. These fuel cells use hydrogen to generate electricity, which could make them a crucial part of the green energy revolution. 

AFC is one of the few ways investors can tap into this booming market. The company is still losing money and in its early stages of development, but it has signed some significant agreements with global multinationals.

Its technology is being used as the primary power source in the charging of Extreme E’s race vehicles. These vehicles are being powered by green hydrogen created on-site by AFC’s fuelling system, which uses micro electrolysers, multiple mobile solar arrays and hydrogen storage technology.

The company’s involvement in this flagship racing event has ignited interest in the technology. I think it could be a turning point for AFC and hydrogen technology. 

That said, this tech is experimental. There is no guarantee it will ever be commercial. That makes AFC a high-risk opportunity. 

Nevertheless, even though the company is still loss-making, and it could be years before the business is sustainable, I would buy the stock for my portfolio as a speculative play. 

The post I’d buy these 2 penny stocks for explosive growth appeared first on The Motley Fool UK.

The first is cleaning products maker McBride (LSE: MCB), due to deliver a full-year report on 7 September. But even before we get to see it, it’s being eclipsed by an August trading update for the next year.

Due to uncertainties regarding raw materials, the company decided in July it wouldn’t offer any 2022 outlook guidance. McBride now says it expects first half EBIT to be around break-even, with profit “heavily weighted towards the second half.”

Pre-tax profit for 2021/22 should drop to around 55-65% below the current 2021 consensus, with debt at 30 June 2022 around 5-10% higher. The share price took a dive in response, though it’s pulled back a little bit since. Despite that, McBride shares are still up more than 30% over the past 12 months. So there’s still some investor confidence there.

Once supply difficulties are passed, I think McBride could have a better future ahead of it. But, for now at least, it’s a penny stock for me to watch and wait.

Pandemic profit boost

EKF Diagnostics (LSE: EKF) shares have had a cracking time during the pandemic. They’re up more than 150% over the past two years, though still at penny stock levels. Interim results are due on 14 September, and an update in July told us to expect “H1 2021 performance in-line with already upgraded management expectations.”

EKF told us its trading reflects “ongoing strong demand for our contract manufacturing services for Covid-19 sample collection devices and associated kits.”

The half is expect to deliver adjusted EBITDA around £12.75m, up from £8.93m a year previously. Cash, net of borrowings, stood at £20.39m at 30 June. Oh, and there’s a 1.1p per share dividend coming, in line with the company’s “modest but progressive dividend policy.”

The board’s hoping for “significant double-digit growth in adjusted EBITDA over the next 3 to 4 years,” even aside from Covid-related revenue. Will I buy? Not without seeing the full results and thinking hard about the stock’s valuation. But I’m definitely adding EKF to my candidates list.

Penny stock troubles

Double glazing firm Safestyle UK (LSE: SFE) is my final penny stock pick, with H1 results scheduled for 23 September. The Safestyle share price has been hovering in the 50-60p range for the past couple of months. But that’s after falling back from nearer 70p in May.

Overall, the stock hasn’t done too badly in the pandemic, up a bit above 10% in two years. But that hides longer-term difficulties, with the shares having lost nearly 80% of their value over the past five years. That’s not really surprising, seeing the earnings collapse of the recent past leading to three years of losses.

July’s trading update told us to expect H1 revenue of about £72.9m, up 13% from pre-pandemic 2019. That seems positive, and the £14.4m net cash at 4 July is another good sign. And the firm said it’s “now generating sustained positive net cash inflows.”

I’d still want to see firm evidence of a sustained turnaround before I’d buy though. It’s wait and see again for me.

The post 3 more penny stocks to watch for in September appeared first on The Motley Fool UK.

And I’d be happy to snap up penny stock Cairn Homes (LSE: CRN) as the housing market in Ireland, just like in the UK, is suffering from severe property shortages that are sending newbuild prices through the roof.

Cairn Homes said in July’s most recent update that “demand for new homes has never been stronger and the lack of supply has never been more acute.” This explains why the penny stock’s closed and forward pipeline rose to 1,530 units as of June, up 65% in just four months.

I’m expecting another positive trading statement when half-year results come out on 9 September, given the steady slew of encouraging news on the Irish housing market.

City brokers think Cairn Homes’ annual earnings will double in 2021. This leaves the company trading on a rock-bottom price-to-earnings growth (PEG) ratio of 0.3 at current prices of 95p. This makes it too cheap for me to miss, in my view, despite the threat posed by soaring building materials prices.

The FTSE 100 fashion star

I believe JD Sports Fashion (LSE: JD) could be a top FTSE 100 stock for me to buy before its next financials come out on 14 September.

The retailer’s results have remained mightily impressive recently as the growth of flexible working has turbocharged the already-impressive rise of the athleisure clothing segment. The strength of JD Sports’ online proposition has also helped the Footsie firm’s profits remain solid, despite the closure of its stores during Covid-19 lockdowns.

I’m also encouraged by the FTSE 100 firm’s expansion into foreign territories and, in particular, its push into the US.

Analysts think JD Sports’ earnings will rise by 20% and 17% in the fiscal years to January 2022 and 2023 respectively. But be aware that the UK retail share trades on a high forward P/E ratio of around 24 times. This leaves it in danger of a share price correction if news flow surrounding the company disappoints.

Another great penny stock

I also believe Safestyle UK (LSE: SFE) could be a top UK penny stock to buy before next month. Recent trading at the window and door supplier has been extremely strong. And I expect another excellent market update on 23 September. Safestyle upgraded its profits expectations at its last investor announcement a few weeks ago.

It’s true that supply chain issues could hit Safestyle’s sales in the months ahead. Still, I believe the outlook for this penny stock over the longer term remains robust. The home improvement market remains solid as broader consumer spending steadily improves. And, as I said earlier, the housing market in the UK is extremely bubbly right now.

So Safestyle could continue to benefit from solid spending on pre- and post-sale renovations. Today, this UK share trades at 54p.

The post 2 penny stocks and a FTSE 100 stock to buy for September appeared first on The Motley Fool UK.

With this in mind, here are three high-risk, high-reward plays trading under a pound that have grabbed my attention.

Cheap penny stock

One penny stock that could turn out to be a bargain in time is Safestyle UK (LSE: SFE). The firm manufactures and sells PVCu replacement windows and doors to the UK homeowner market. That’s about as dull a company as you’re going to find on the market. Notwithstanding this, I’m encouraged by recent trading.

Last month, Safestyle revealed it had managed to grow revenue, margins and its order book over the first half of 2021. In fact, it now expects full-year performance to be “ahead of current expectations“. That’s impressive, considering just how damaging the pandemic was to business last year.

Naturally, there are still risks. We could see a normalising of demand as people spend their lockdown savings on other things. The rising cost of materials used by Safestyle can’t be discounted either. 

With a net cash position and shares trading at less than 13 times earnings however, I think the potential reward might be worth it. 

Buy the dip?

Another penny stock that grabs my attention is Greatland Gold (LSE: GGP). I first became bullish on this miner when its shares changed hands for less than 2p a pop. From there, the price exploded to a high of 38.5p last December, thanks to positive drill results and the involvement of industry giant Newcrest.

Unfortunately, GGP has now retreated in value. In fact, its share price has fallen by over 50% in 2021, so far. This can be a common trend with penny stocks, especially miners.

After all, finding precious metals is just half of the challenge. Digging it up can be just as problematic, as well as costly. I’d need to keep this in mind if I were to invest in Greatland now.

However, I do think this remains one of the best junior copper/gold plays around. Last month, the company announced that recent drilling results “continue to support the potential for resource expansion” at its joint-owned, world-class Havieron project.

This could add even more value to the deposit GGP has located. The fact that it also operates in Western Australia rather than a more politically volatile part of the world is another attraction.

Travel surge

With signs that Covid-19 is in retreat, investors will be looking to play the full recovery in travel and leisure stocks. One that probably stays off most radars however, is Hostelworld (LSE: HSW).

Back in April, the online booking platform reported that uptake volumes had been “weak” throughout the first quarter of its financial year. Nevertheless, domestic trade was described as “recovering“, with the North and Central American markets looking the most sprightly.

Since then, of course, vaccination programmes have been in full swing. This may allow the company to provide some guidance on full-year earnings when it reports interim numbers next Wednesday (11 August). 

If the outlook has improved (and I think it has), this penny stock could be trading over a pound soon. Then again, the drop in the share price over the last few years, not to mention the strong competition it faces, suggests I’d still need a strong stomach to invest.

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High margins attract competition

When a business has high margins and is therefore highly profitable, it’s only natural that others will look at the business with envious eyes and want a piece of the pie for themselves. You want your chosen company to invest to have a moat to protect it from those predators looking to eat into its market share. 

Consider Apple, the world’s most valuable company. It has high margins, so how does it protect itself? The Apple ecosystem. Everything is geared towards making the customers’ lives easier, so that they do not want to switch to any competitors. Apple has a high retention rate – once people start using Apple products, they rarely wish to change to any other phone or laptop manufacturer.

This is how the business has developed a huge fanbase, and an almost cult-like status.

Low margins need defending too

Not all high margin businesses are highly profitable companies, and not all low margin businesses are highly unprofitable companies either. 

Look at Ryanair (LSE: RYA), the airline that’s so cheap the founder has claimed he would get rid of the airline seats if he could. He has a relentless focus on driving down prices, which is of course the company’s moat. 

It’s hard to damage Ryanair when most of its competition has higher operating costs per seat than Ryanair charges in revenue. Despite the low margins, Ryanair has been able to carve out a growing aviation empire by hammering down on its core competencies: achieving low cost through superior volumes and leveraging those volumes for attractive supplier agreements.

The larger the volume of passengers and business it brings, the more attractive the supplier agreements become.

No moat leaves your stock open to attack

When a company doesn’t have a moat, then it is susceptible to being copied. This happened to UK window seller Safe Style (LSE:SFE) which had high margins and managed to grow across the UK. Unfortunately, there was no moat in fitting and selling windows and competitors soon appeared and drove the price right down, eroding those margins.

The best companies on the stock market often have wide and discernible moats. These can be created through intellectual property or product ecosystem, or the nature of the business itself through volume. If your portfolio is full of stocks that have no real moats, then perhaps it’s time to have a rethink about your ownership in them.

The post 3 Reasons why your investments should have moats appeared first on The Motley Fool UK.

Of course, while a correction is painful in the short run, it could create buying opportunities for the long run. I think stocks such as Barclays (LSE: BARC) now appear to offer wide margins of safety, which could lead to improving total returns in the long term.

Clearly though, some cheaper shares may be worth avoiding due to the risks they face. One such stock released a trading update on Monday after a challenging period.

Uncertain prospects

The stock in question is Safestyle UK (LSE: SFE), the manufacturer and retailer of PVCu replacement windows and doors. It has experienced significant financial challenges in recent months, largely due to a weak operating environment. This contributed to a fall in its share price of around 50% in the last year.

But the company’s update also showed an improved sales order intake since its Commercial Agreement with its co-founder Mitu Misra was delivered in October. It has seen a substantial increase in its contracted workforce across its canvass, sales, surveying and installation operations. It has also invested more than expected in lead generation, commissions and associated overheads. These are due to benefit its performance in the 2019 financial year.

Despite the potential for improving profitability, Safestyle UK faces a challenging operating outlook. Spending on non-essential items is weak at present, and this situation could continue as the Brexit process continues. As a result, it may be a stock to avoid, in my opinion.

Improving outlook

The FTSE 100’s fall could mean, though, that there’s now a number of buying opportunities around. The Barclays share price has dropped by 24% in the last year as investors have become increasingly concerned about the outlook for the world economy. That’s unsurprising, since the threat of a global trade war and the possible impact of rising US interest rates could hold back the financial performance of global businesses.

As a result, the margins of safety on offer could be wider than they have been for a number of years. This could create buying opportunities for long-term investors – especially since global GDP growth is expected to be around 5% per annum over the medium term. This suggests that while there are risks, the underlying prospects for global stocks could be stronger than investors are currently anticipating.

Since Barclays has a price-to-earnings growth (PEG) ratio of 0.7, it appears to offer growth at a reasonable price. Although there could be further falls in its share price ahead, investors who are able to look at the long-term prospects for the business and the wider economy may be able to generate improving returns from buying while the stock trades at a low ebb. From a risk/reward perspective, the bank could be highly appealing despite the uncertainty that it faces.

The post Why I think the Barclays share price is an opportunity to play the FTSE 100’s weakness appeared first on The Motley Fool UK.

But its tremendous record of growth came to a screeching halt in early 2017 as the bank issued an out-of-the-blue profit warning, leaving bullish investors, like myself, wrong footed. This, of course, is part and parcel of investing, and should be treated as an opportunity to learn where a thesis went wrong and how such an issue can be avoided again in the future.

For Provident, the issue was management’s move to end its relationship with its army of self-employed agents who covered a certain geographic area where they would have relationships with customers to whom they would extend credit and collect repayments. In their place, management sought to employ a percentage of these workers on an in-house basis and use a new computer system to improve the lending process and lessen regulatory risks from using contract employees.

On the face of it, this move made sense to investors like myself. However, things clearly went wrong when the new computer system proved to be not up to scratch and, more critically, many self-employed agents decided to not come in-house. That left Provident with large areas where no new loans were being made and existing loan repayments weren’t being collected.

What did I learn from this? First off, don’t underestimate the potential effects from any change to a company’s core business, even if it’s one that seems to make sense such as bringing field loan officers in-house.

Second is to make a more concerted effort to listen to what the employees of a firm are saying. In Provident’s case, there were plenty of agents complaining publicly about the changes before management was forced to issue its profit warning.

Competitive issues 

Another stock I was very wrong about was Safestyle UK (LSE: SFE), a large PVC window and door replacement manufacturer and retailer. The company’s first few years as a public entity went smoothly as it reported consistent sales and profit growth on the back of growing share of its highly fragmented market.

But this came to an abrupt halt last year with a shock profit warning. That turned out to be down to a rival operation setting up shop in Safestyle’s own backyard with a similar business model, branding and even many former employees.

What did I get wrong here? Well, the big problem was overestimating just how much of a moat Safestyle had to ward off competitors. The new competitor proved adept at producing and selling its products at a similar price point to Safestyle, which I had thought highly unlikely given the company’s vertically integrated business model.

There were several important lessons learned from this one. Ensure as much as possible a company’s competitive advantage is deep and lasting; pay closer attention to whether customer decisions are driven more by price or quality; and to take a look at a sector’s history, which could have tipped me off to previous problems in Safestyle’s market. 

The post Two stocks I was dead wrong about and what I have learned appeared first on The Motley Fool UK.

Looking ahead, further challenges may be on the horizon. However, could it now offer good value for money alongside another stock which is also experiencing a difficult period?

Uncertain outlook

Having reported a 25% fall in earnings in the 2017 financial year, 2018 does not appear to be improving for Safestyle. It continues to experience weak demand from consumers who have seen their disposable incomes fall in real terms in recent months. Alongside continued pressure from a new market entrant, this has meant that demand for its services has been below previous guidance.

Sensibly, the company is seeking to retain capital in case such conditions continue over a prolonged period. Therefore, it has cancelled the final dividend for 2017, while also undertaking a strategic review. Alongside this, it has appointed a new Chairman and will seek to refocus its efforts on becoming more efficient and delivering improved performance.

Clearly, Safestyle is now set to deliver a fall in earnings versus the previous year. However, it trades on a price-to-earnings (P/E) ratio of just 4 using last year’s earnings. As such, it appears to offer excellent value for money, although its difficult trading conditions could last for some time.

For investors who are generally upbeat about the UK economy, there could be a value opportunity on offer. Pressure on household incomes is falling due to lower inflation, and this may provide a boost for the company. But with its share price in freefall, Safestyle is likely to be of interest to only the least risk-averse of investors at the present time.

Turnaround potential

Also experiencing a difficult period is support services company Travis Perkins (LSE: TPK). The business has recorded two consecutive years of declining profitability, and is set to report further falls in its bottom line this year. Part of the reason for this is a general slowdown in demand across its key markets, with the UK economy’s growth rate having been downgraded since the EU referendum.

However, with Travis Perkins seeking to become more efficient, it is expected to return to positive growth in the current year. Certainly, growth of 5% may be relatively modest. But it would show that the business has underlying strength and is capable of performing well even in difficult market conditions.

Since the stock trades on a P/E ratio of around 13 and has a dividend yield of 3.7%, it appears to offer good value for money. With dividends being covered 2.3 times by profit, it could prove to be a strong income stock. Therefore, while potentially risky, now could be the right time to buy it.

The post Does the Safestyle share price’s 20% fall make the stock a bargain? appeared first on The Motley Fool UK.

Back then the business, which manufactures and sells doors and windows in the UK, warned in a trading update that it expected profits in 2018 “to be materially below 2017 levels and current market expectations.”

It said that a blend of deteriorating consumer confidence and the emergence of an “aggressive” market entrant had damaged operations and that, as a consequence, orders since the turn of 2018 had “disappointed” and fallen shy of expectations.

To the cheer of income investors however, Safestyle said that its robust cash generation and solid balance sheet would see it pay a final dividend of 7.5p per share and so take the full-year reward to 11.25p, in line with the prior year.

The company made good on this vow today and City analysts at least expect the business to pay an identical dividend in 2018, even though earnings are expected to fall 15%. Safestyle subsequently carries a monster yield of 12.3%.

The bubbly predictions do not end here however, and the Square Mile is tipping the double glazing firm to flip back with a 13% profits rebound in 2019. And this leads to speculation that the dividend will improve to 11.4p, pushing the yield to an even mightier 12.5%.

But I’m not so sure that these predictions aren’t looking just a tad giddy.

Dividends on the rack?

Safestyle advised today that while the average unit sales price rose 7.6% in 2017, the number of frames it installed last year slumped 7.9% to 265,716. This pushed revenues 0.5% lower to £158.6m and this, combined with higher costs, drove underlying pre-tax profit to £15.1m, a 26.3% year-on-year slump.

The AIM-quoted business has a mountain to climb to turn around its bottom line. Although it is taking steps to cut the cost base and to improve turnover by modernising its sales teams, the tough conditions that caused profits to tank last year look set to persist for a whole lot longer.

And this puts dividends in danger in my opinion. Dividend coverage through to the close of 2019 ranges at between 1.1 times and 1.3 times, a country mile below the widely-regarded security watermark of 2 times and above. Meanwhile, cash on the books fell to £11m by December from £13.5m a year earlier, and the investments Safestyle is about to make to improve its processes will put even more strain on its balance sheet.

Despite its low forward P/E ratio of 7 times I believe the windows giant carries far too much risk to make it a sensible investment destination. The share  has lost 70% of its value over the past year and it is not difficult to foresee a further collapse, particularly if the dividend is put through the mincer.

The post Why I’d sell this dividend stock despite its 12% yield appeared first on The Motley Fool UK.

I’ll come back to the other company in a minute, but first I’d like to explain why I think Safestyle’s forecast dividend yield of 11% is likely to be a trap you should avoid.

The game has changed

Market conditions may well be tough. But in its latest profit warning, Safestyle also complained about an “aggressive new market entrant”. Presumably this company is forcing down profit margins in the sector with lower prices.

However, it’s worth remembering how profitable Safestyle has been in recent years. In 2016, it reported an operating margin of 12% and a return on capital employed of 48.1%.

Those are very high figures, given that replacement windows are a fairly standard product. I’m not surprised that such high returns are attracting more competition.

The company is safe, but the dividend isn’t

There doesn’t seem to be any immediate risk that Safestyle will go bust. The group reported net cash of £17.7m at the end of June last year, and says that its operations remain cash generative.

But 2018 results are expected to be “materially below 2017 levels”. I expect margins to fall, as market conditions remain competitive.

Current forecasts suggest that earnings could fall by 10% to 12.8p per share in 2018. That leaves very little cover for the projected dividend of 11.3p per share. In my view, a cut is likely. I’d look elsewhere for income.

Try this for size

If you’re attracted to the homebuilding and construction market, you might want to consider Eurocell (LSE: ECEL). Like Safestyle, this door, window and roofline product firm is vertically integrated. In other words, it manufactures and retails its own products.

Eurocell only floated in 2015, when it attracted big name backers including fund manager Neil Woodford, whose funds have a 15% stake in the firm.

The group’s 2017 results suggest performance remains stable. Sales rose by 10% to £224.9m last year, while adjusted pre-tax profit rose by 1% to £24.5m. Adjusted earnings per share were 2% higher, at 20.44p.

Shareholders will receive a total dividend of 9p per share, a 6% increase from 2016. My calculations suggest this £9m payout should be covered comfortably by last year’s free cash flow, which I estimate at £14.5m after acquisitions.

The way forward

Like Safestyle, Eurocell benefits from good cash generation. Net debt fell by 28% to £14.5m last year, despite the firm investing in 31 new branches. This Alfreton-based company now trades from 190 branches, but the recent rapid pace of growth seems likely to slow.

Chief executive Mark Kelly says that the firm’s focus in 2018 will be “on optimising our branch network” and “expanding further our recycling capability”.

Although “challenging” markets and rising prices for raw materials remain a risk, analysts expect earnings to rise by 10% to 22.4p per share this year. The dividend is expected to rise by 9%. These figures put the stock on a 2018 forecast P/E of 9.5, with a prospective yield of 4.5%. In my view, this could be one of the best buys in this sector.

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