The futuristic dream of a 3D printer in every household is already within reach, with the price of some consumer-oriented models coming in at less than £200.

Although that might sound like money only a tech enthusiast would splurge, consider the long-term savings a normal household could make by downloading free models of plastic items they would otherwise buy – like coasters, combs, cups, dice, food moulds, ice cube trays, key rings, phone cases and so much more.

Meanwhile, 3D printing – otherwise known as ‘additive manufacturing’ – already has a strong foothold in industry, especially when it comes to highly complex parts produced in small batches, like functional prototypes or complex parts for military equipment.

Aerospace and defence firms in particular do not want to invest in expensive tooling equipment if they only need to make an input at a low volume, so 3D printing has been widely adopted to overcome this problem – for example, additive manufacturing has been used by Airbus to make cabin wall panels and by L3Harris Technologies to make antennae.

Xaar: from 2D to 3D printing  

Much like tobacco companies have invested in e-cigarettes and oil companies in green energy, digital inkjet company Xaar (LSE:XAR), established in 1990, has diversified into 3D printing to keep up with the changing times.

An early mover in the space, the company was awarded ‘Innovation of the Year’ at the 3D Printing Industry Awards in 2018 for its efforts at making the technology mainstream in manufacturing.

Disappointingly, it disposed of its Xaar 3D division at the end of 2021, allowing Stratasys – a US-listed company – to buy out all of the shares in that operation. Xaar 3D’s flagship offering is Selective Absorption Fusion (SAF) technology, an industrial-grade technology with the objective of improving accuracy and consistency in parts manufacturing processes.

On the bright side, Xaar still retains royalty rights, equal to 3% of revenues generated by Xaar 3D for 15 years. It has also strengthened its balance sheet by receiving the cash injection from Stratasys while cutting loose the loss-making division. 

Whatever the challenge requires…

At the same time, Xaar remains exposed to the 3D printing sector’s strong growth (forecast to hit a compound annual rate of 21% from 2022 to 2028) by selling ‘printheads’. The printhead is the mobile part that transfers the image onto the media – capable of dropping, melting, spraying, writing, etc, onto its target.

With a huge portfolio of printheads, fitted with melting chambers, nozzles and a host of other gadgets capable of dutifully carrying out the printer’s directions using viscous liquids, plastics or whatever else the challenge requires, Xaar has leveraged its technical prowess in the inkjet sector to make itself an indispensable partner to the up-and-coming 3D printing sector.

However, with an expensive forward price-to-earnings ratio of 230, the pressure is on for Xaar to live up to analysts’ lofty expectations of an annual growth rate of 31% per year out to 2027. Any hiccups along the way, and this UK stock’s price could take a nasty tumble. So for now, I’m staying on the sidelines…

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As such, I’m happy to invest in these companies but will only deploy a small amount of money, such as £3,000, into a well-diversified portfolio. I think this will help me reduce risk while maximising profitability. 

With that in mind, here are three penny stocks I’d buy with £3k.

Penny stocks to buy 

The first organisation on my list is the engineering group Lamprell (LSE: LAM). A leading provider of fabrication, engineering and contracting services to the offshore and onshore oil & gas and renewable energy industries, the company has struggled in recent years. The falling oil price has caused oil producers to cut expenditure. Lamprell’s sales have plunged as a result. 

However, the company has recently been growing its renewable energy business. I think this will be a cornerstone for group growth as we advance. I also think the business will benefit from the general economic recovery over the next few years. Those are the main reasons why I would buy this penny stock for my portfolio now. 

The main risk the corporation faces right now is the risk that the economic recovery does not live up to expectations. This could translate into further losses for the business and its investors. 

Financial services 

Currency management firm Record plc (LSE: REC) handles currency risks for customers. In recent years, the group has been focusing on growing its higher-margin business lines. These efforts are expected to translate into earnings growth next year.

Analysts predict net profits of £8.5m in 2022, the highest level of income for the business in many years. That said, these are just projections at this stage. 

The company faces multiple risks that could limit its ability to meet this target. Competition in the financial services market could impact the group’s profit margins. Additional regulations may also lead to increased costs, which would affect profits.

Despite these challenges, I would buy the shares for my portfolio of penny stocks, considering its potential in the next few years. 

Digital inkjet technology

Xaar (LSE: XAR) develops digital inkjet technology, which is used for multiple printing applications. The group started to struggle in 2018, but it is forecast to achieve a steady recovery this year. This time last year, analysts were expecting the firm to lose more than £10m for the year. Losses of around £5.5m are now projected. 

These are only projections, and Xaar may never live up to its full potential. Still, I think the stock has tremendous potential. 

Of course, there is a significant risk the group will not meet City growth expectations. If it does not, investors may turn their backs on Xaar, as they did previously. The main risks to growth include high costs and competition. I will keep an eye on these challenges from now on. 

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With its shares offering a margin of safety, they could generate an improving level of capital growth in the coming years. As such, it could be worth buying right now, with it having the potential to help investors to overcome a rising State Pension age.

Uncertain future

In fact, relative to a number of other stocks, the retailer could offer excellent value for money. One example of a company which appears to be overvalued given its growth outlook is industrial inkjet technology specialist, Xaar (LSE: XAR). It released a disappointing trading update on Monday which showed that it expects to increase inventory and debtors provisions by £7m. Previously reported delays in the ramp-up of new product volumes in China have caused an unfavourable working capital ageing profile.

Looking ahead, the company is forecast to post a fall in net profit of around 5% in the current year. Despite this, it trades on a price-to-earnings (P/E) ratio of 20, which suggests that it lacks a margin of safety. It also indicates that investors have not yet factored in its uncertain future, which could mean that its shares experience further challenges in the near term. As such, now may be a time to avoid Xaar, with its disappointing growth outlook and high valuation making it relatively unappealing.

Improving outlook

By contrast, Tesco offers an impressive growth outlook. Even though consumer confidence in the UK is weak ahead of Brexit, the stock is expected to post a rise in net profit of 20% in the current financial year. Investors do not appear to have factored in such a high rate of growth, with the company’s shares having a price-to-earnings growth (PEG) ratio of just 0.8. This makes it one of the cheaper FTSE 100 retailers at the present time, which may mean that it is able to outperform many of its industry peers.

One potential threat facing the company is competition. In recent years the business has sought to focus on the UK supermarket segment, which is becoming increasingly crowded. This trend is likely to continue as many of its smaller rivals are set to open a number of new stores over the next few years. Alongside shoppers who are increasingly price conscious, this may not create favourable operating conditions for the business.

However, with a low valuation and a strategy that aims to adapt, while also improve efficiency, the future prospects for Tesco seems to be strengthening. As such, it could offer growth potential which helps to boost an individual’s long-term retirement plans as the State Pension age rises.

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Profit warning

I was later shocked by a profit warning on 30 August, apparently triggered by weak trading since June and poorer than expected adoption of one of Xaar’s latest printheads. The share price dropped off a cliff, losing 30% of its value on the day.

But interim results Wednesday, together with the announcement of a commercial success, caused the price to pick up 6.5% in morning trading, so maybe the fall has been overdone.

Underlying revenue for the half dropped by 39%, with most of that caused by falls in legacy ceramics printing, but the slower update of the firm’s Xaar 1201 printhead also played its part. We’re also looking at an adjusted pre-tax profit of £3.2m, down 60% on the first half of last year, with adjusted EPS cut in half to 4.6p.

And that previously impressive dividend has taken the brunt of the crisis, slashed to 1p at the interim stage from 3.4p. Is there any good news?

Long term?

Chief executive Doug Edwards continued the theme that it’s all down to the ceramics business and the disappointing sales of that new printhead, but remains confident that the “long term opportunity for Xaar remains very significant.”

Then there’s the news that Windmöller & Hölscher have decided on the Xaar 5601 printheads for the development of a single-pass press for flexible packaging. Mr Edwards described the deal as a “significant milestone for Xaar.”

Full-year forecasts have been slashed and the dividend has taken a break, but short-term hard times can be great for recovery investors — just as long as there are no further profit warnings.

Fashion star

Online fashion retail is eclipsing traditional high street shops these days, with Boohoo Group a recent darling with growth investors — though its share price looks suspiciously like it’s following a similar roller-coaster trajectory to ASOS before it.

Quiz (LSE: QUIZ) is the latest comer to the scene, attempting to reshape itself into an online destination for the current generation of fashion shoppers and away from its solid bricks-and-mortar legacy. Its first set of annual results as a listed company looked impressive enough.

An AGM day update on Wednesday painted a picture of everything going to plan, with the firm reporting a “positive customer response to Quiz’s product range over the summer.” Partnerships with Next and Zalando have boosted the company’s online presence, but this year Quiz has also been seeing stronger growth through its own websites.

Good buy?

There’s a bit of a hit from Quiz’s association with House of Fraser following that company’s troubles, but Quiz reckons it’s “on track to deliver market expectations for the full year.”

Would I buy the shares? Well, they’re priced a good deal more cheaply than those of ASOS and Boohoo, at least on forward P/E terms. There’s a multiple for Quiz of 21 for this year, dropping to 17 based on 2020 forecasts, while ASOS and Boohoo are facing huge P/E valuations of 63 and 44 respectively.

I do see some volatility risk in the medium term here, but I’m cautiously optimistic about the prospects for Quiz in the long term.

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Clearly, there could be greater value investing appeal on offer after their share price falls. However, the two stocks could experience further falls in the short run due to weak investor sentiment. As such, is now the right time to buy them for the long term?

Profit warning

Industrial inkjet technology specialist Xaar’s profit warning on Thursday showed that the company continues to face a difficult outlook.

Revenue for the first half of the 2018 financial year is expected to be £35m, which includes £9.8m of one-off royalties. Underlying trading since the end of June has been worse than expected by the company. Adoption of the 1201 printhead has been substantially slower than anticipated. Alongside a high rate of decline in ceramics, this has offset the positive reception of new products.

In response to the challenges it is facing, the company is undertaking a review of strategic options for more extensive partnering in the printhead business unit. However, the reality is that the stock could experience further share price weakness following its recent fall. Investors may take time to digest the profit warning, and this could lead to additional paper losses for existing investors in the short run.

While Xaar has the potential to deliver a successful turnaround, it may be prudent for investors to await positive news from the company. As such, now does not appear to be the right time to buy it, with its risk/reward ratio being relatively unfavourable.

Turnaround potential

The performance of the IQE share price has also been disappointing. It has fallen by 28% in the last year, with investors seemingly less interested in the company’s long-term growth prospects than they were in previous years.

Of course, the company’s performance continues to be relatively strong. A recent update showed that IQE is making good progress with its overall strategy, and that it is delivering strong profit growth on an underlying basis. This is expected to lead to growth in earnings of 6% in the current year, followed by further growth of 32% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 0.7, which suggests that it offers a wide margin of safety following its recent stock price fall.

Although there is the possibility of further declines in IQE’s valuation in the near term, the company’s long-term growth potential appears to be sound. Therefore, for investors who can live with heightened volatility and the realistic prospect of further paper losses in return for what seems to be a favourable risk/reward ratio, now could be the perfect time to buy the stock for the long term.

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Profit did fall, as predicted, but adjusted pre-tax profit only dipped modestly from £19.5m to £18m, with diluted EPS down just a smidgen from 21.2p to 20.7p.

The company has been suffering from a falloff in its ceramic tile decoration business and is in something of a transformation period, but it’s seeing revenue growth from new products. In fact, the seven new products launched in the last two years, plus the acquisition of Engineered Printing Solutions, brought in 80% of 2017’s total product revenue.

Overall revenue actually rose slightly, by £3.9m to £100.1m, and I see that as a sign that Xaar really is turning the corner since a profit warning sent its shares tumbling back in November — as, apparently, does the market.

Turnaround

Looking at the firm’s new products, it saw a “strong performance” from its 1201 thin film printhead, with a two-year distribution agreement for 90,000 units in the bag. And there was good progress from the 5601 thin film printhead development too, with the design frozen and the first development kits shipped to eight partners.

Analyst forecasts are a bit up in the air at the moment, with a 40% drop in EPS indicated for 2018. But I can see that being adjusted more optimistically now, and the 46% EPS rise pencilled in for 2019 could be edging closer.

The 2017 dividend was lifted by only 2% to 10.2p, to yield 3.8% on the previous close, but its growth is expected to accelerate in the next couple of years. And over the medium term, it’s well ahead of inflation, up 27.5% in four years.

Back in front?

Speaking of turnarounds, the past five years haven’t been good to Empiric Student Property (LSE: ESP) shareholders. Though the price was riding high in September last year, first-half results from the real estate investment trust (REIT) were not taken well, and the share price has since slumped. At 87p as I write, the shares have gone nowhere overall since flotation in 2014 — but there’s at least been around 9% in dividends in total.

After an operational review in November, the trust cut its dividend target for 2017 from 6.1p per share to 5.6p, and it’s just announced an actual payment of 5.55p. At the time, Empiric reckoned it had grown too fast and overstretched itself, and on Wednesday confirmed that its 2017 operating margins and dividend cover were “reduced by a number of financial and operational inefficiencies within the Group and its supply chain.“

Dividends adjusted

The target dividend is now set at 5p per share for 2018, which will disappoint some. But I see it as a sensible step while the company refocuses, and one that will help it achieve progressive dividend rises above inflation in the long run — especially when the current shakiness in the property market starts to settle.

Meanwhile, the company’s portfolio valuation stood at £890.1m at 31 December, up from £721.3m a year previously, with year-end net asset value (NAV) per share at 104.37p.

That puts the shares on a discount to NAV of nearly 17%. REIT shares typically trade at a discount, but I think that gap is too wide, and I see Empiric Student Property as a good pick to beat inflation over the next decade.

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That’s the situation with digital inkjet technology developer Xaar (LSE: XAR). The company’s share price declined by over 15% on Monday after it released a profit warning. Could now be an opportunity to buy it for the long run? Or, is it a stock which is best avoided at the present time?

Difficult period

The company is facing a more difficult second half of the year than it had anticipated. It had expected its sales to be weighted towards H2, with growth in revenues from new products due to increase. However, it now anticipates sales to be similar to the level in the first half of the year. This is due to fewer than planned new printer installs of Xaar’s 2001 Printhead, as well as a slower ramp up of the Xaar 1201 Printhead due to supply constraints.

In ceramics, the company’s printhead replacement business is now expected to represent around 70% of revenue in 2017. There has been strong demand for the new 1003 Printhead, but due to intense competition for new printer installs, there has been more limited success with the 2001 product.

Due to supply constraints, it has not been able to fulfil all of the demand for the 1201 Printhead. It expects to rectify this with new capacity which is due to come on stream in 2018. Following this, it expects to see significant growth from 2018 onwards.

Positive outlook?

Despite a difficult period for the business, it has been able to reduce its dependence on the legacy ceramics business. This could be good news for the company’s future since the ceramics business faces reduced visibility as competitive pressure increases. Furthermore, the company continues to invest in sales and marketing as it seeks to deliver on its transformation plans.

However, its near-term outlook appears to be difficult to judge. It seems to be facing multiple challenges at the same time as it is trying to change its business model. This could prove difficult at a time when many of its products are facing increasing levels of competition. This could mean further disappointment over the coming months.

Therefore, with the stock trading on a price-to-earnings (P/E) ratio of 17.4 using last year’s earnings figure, even after its 15% share price fall, its risk/reward ratio does not yet appear to be favourable. It may be prudent for investors to avoid the stock at the present time.

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Printing profits

Commercial inkjet printing specialist Xaar (LSE: XAR) made its name with digital technology for printing designs on ceramic tiles. But this former growth business has now matured and the group is trying to diversify into areas such as 3D printing.

Today’s half-year results have pushed the shares up by 3%, suggesting to me that investors are cautiously optimistic about the firm’s progress. Product revenue excluding ceramics rose by 60%, confirming that the group’s diversification strategy is working.

However, revenue from the group’s ceramics business fell by 25%, offsetting much of the growth elsewhere. The company says that almost all production capacity has already been converted to digital technology of the kind provided by Xaar. So future sales will be largely limited to product replacement.

Overall revenue for the period was broadly unchanged from the first half of last year, at £44m. Adjusted pre-tax profit fell from £8.8m to £7.9m, while net cash dropped from £49.3m at the end of 2016 to £38.3m at the end of June.

The group expects to report “continued new product growth” during the second half of the year. Current forecasts put the stock on a forecast P/E of 28 for 2017, with a prospective yield of 2.9%.

This looks expensive, but broker forecasts also suggest that profits may rise by 38% in 2018, as sales take off. If these projections are correct, Xaar could enjoy several years of strong momentum, justifying a higher share price.

On balance, I’d give this stock a cautious ‘buy’ rating.

This year’s biggest surprise?

When Sports Direct International bought a 26% stake in video games retailer Game Digital (LSE: GMD) in July, it kick-started a surge of demand for the firm’s shares. Further gains were seen after a strong trading update in August, and the shares are now worth 40% more than they were one month ago.

The group expects to report net cash of £47m for the year-ending 30 July. Based on the current market cap of £63m, this means the market is valuing Game’s retail business at just £16m.

One reason for this is probably that this business is only marginally profitable. Although sales are expected to have risen to £780m last year, analysts are forecasting a net profit for the year of just £6.1m. I’d normally be cautious about getting involved in a situation like this, but I believe the company has some advantages.

The first is that the store portfolio is all on very short leases. Management should be able to take advantage of falling high street rents to cut costs.

Game is also making good progress in the fast-growing ‘e-sports’ live gaming market. Revenue from events and e-sports rose from £4.8m to £7.1m last year, and the group is prioritising further development of this area.

Finally, in 2014 and 2015, the company generated an operation margin of about 3%. If management can return performance to this level, then I believe the shares would look very cheap indeed at under 40p. I continue to rate the shares as a special situation ‘buy’.

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The digital inkjet printing powerhouse declared that trading came in as expected between January and June, with sales for the period predicted at around £44m.

And affirming the guidance made in March, Xaar said that “revenue will be more second half-weighted than usual with growth anticipated from recently introduced new products.”

In other news, the Cambridge firm announced it had signed a joint development agreement with Xerox that will see the two “develop together the next generation of industrial bulk piezo printheads using the extensive combined resources and IP of both companies.”

Both tech giants will benefit from the use and commercialisation of the resulting products, Xaar noted. And chief executive Doug Edwards added: “Through sharing the R&D investment in the next generation bulk piezo platform, the company will make savings which we will deploy into our sales and marketing function, as we continue to transform the business from an internally focused product company to a market- and customer-centric business.”

Back in business?

But those seeking an immediate earnings explosion should look somewhere other than Xaar. The business has endured three successive annual falls and another hefty reduction, this time by 43%, is forecast for 2017.

However, the business is expected to rebound with a 36% advance in 2018, the company’s huge collection of recently-launched products set to light up the bottom line. And with the company also likely to remain on the hunt for acquisitions — net cash stood at a healthy £49.3m as of December — I reckon Xaar could deliver sustained, and delicious, earnings expansion long into the future.

While a forward P/E multiple of 32.3 times may be expensive on paper, I reckon the stock’s vastly-improved sales outlook makes it worthy of such a handsome rating.

Not quite there

Aggreko (LSE: AGK) is another London-listed stock expected to endure some near-term earnings turbulence.

Like Xaar, the power systems rental play has seen earnings shuttle lower for many years now, and an extra 6% fall is predicted for 2017 as trading troubles in Argentina persist. Still, the City expects this year to represent the last year of profits pain, and a 12% rebound is anticipated for 2018.

I am not so convinced, however. While Aggreko’s core Rental Solutions division has seen revenues from the North American fossil fuel sector stabilise more recently, there are signs that the supply glut that is currently putting crude prices on the defensive again. This scenario is persisting for much longer than anticipated and could see sales come under pressure again.

Other than this Aggreko is actually performing well. Indeed, revenues at Rental Solutions rose 8% in January-March excluding oil and gas. And revenues at its Power Solutions unit moved 17% higher.

A forward P/E ratio of 14.5 times is attractive on paper, but not low enough to encourage me to part with my cash. I believe Aggreko is still not out of the woods.

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Over the past year shares in Paypoint have fallen by 1.5% excluding dividends, while shares in Xaar have declined by a staggering 20.5%. Over the same period, the FTSE 100 has added 22.4% so you might have been better off buying a FTSE 100 tracker fund than either of these market laggards.

However, when it comes to income, both Xaar and Paypoint offer much more than a simple FTSE 100 tracker.

Dividend champions

After recent gains, at the time of writing the FTSE 100 supports a dividend yield of just under 3.7%. Even with the lowest-cost tracker fund on the market, investors would receive less than 3.5% per annum in income by investing in the UK’s leading index.

Shares in Paypoint on the other hand, currently support a dividend yield of 4.4% and City analysts expect this to rise to 5.1% as management looks to increase the company’s dividend payout towards the end of the financial year.

Investors have moved away from Paypoint in recent months because the company is struggling to grow in the UK’s increasingly competitive payments market. After growing earnings per share from 45.7p for the financial year ending 31 March 2013, to 64.3p for the year ending 31 March 2017, City analysts expect earnings per share to fall by 4% for this financial year. As the company is currently trading at a forward P/E of 15.6, falling profits are a cause for concern.

Still, Paypoint’s dividend remains well covered by earnings per share and the company is highly cash generative with few capital spending obligations. Fiscal 2018’s payout is expected to be covered 1.3 times by earnings per share, and for the past five years the company has generated £17.6m and excess cash after capital spending and dividend payments.

Falling earnings

Xaar is another company that’s suffering from declining profits, but investors seem to be overlooking the firm’s dividend potential. Earnings per share slumped from a high of 44.9p in 2013 to an expected low of 13p for 2017. However, City analysts expect earnings to rebound by 38% to 18p next year, and a dividend payout of 11.3p per share has been pencilled-in for this period.

This estimated payout means Xaar’s shares support a forward dividend yield of 3.1%, which is below the market average, but there’s plenty of room for further payout growth. Like Paypoint, Xaar is swimming in cash having issued no debt during the past five years and generating £37m in cash from operations after capital spending and dividend payments. As a result, when earnings stabilise, I wouldn’t rule out a substantial dividend increase or special payout.

The one downside about Xaar is that the company’s shares look relatively expensive compared to its earnings growth (or lack of it). Shares in the company currently trade at a forward P/E of 25.3, which may be unpalatable for some value investors.

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