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5 penny stocks I’d buy for 2022 and beyond

British Pennies on a Pound Note
Written by Publishing Team

Some of my biggest investment gains have come from small businesses. That’s why I like to stay on top of smaller stocks that I believe are undervalued by the market.

I’ve been researching potential trades and found five stocks I’d like to add to my portfolio in 2022.

5 stocks to try to build wealth after 50

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I think all of these unpopular stocks look good value and can make big gains over time. But there are no guarantees. Sometimes there’s a good reason a stake is cheap. Problems may be lurking in the background. The business may lose major customers.

Small-cap stocks also tend to be more volatile than large stocks. Losses (and gains) can be very surprising. For these reasons, I would never invest in small stocks with money I can’t afford to lose.

I think this share can double

My first pick is a business I’ve been following for several years. I think now might be a good time to buy. Gulf Marine Services (LSE: GMS) owns a fleet of offshore rigs chartered to clients in the Middle East and elsewhere.

The Gulf Naval Fleet is very modern, but this has led to a problem. The company financed its fleet expansion with debt. By 2016, net debt exceeded $400 million, but the oil market crash in 2015 caused demand for rig rentals to plummet.

However, the business is undergoing new management, reporting regular contract wins and improved fleet utilization. Most importantly, the debt began to decline.

Gulf Bahri shares are currently trading at over 3.5 times the expected 2022 earnings. This reflects the company’s high debt burden. But if the debt continues to fall, I think the stock should be revalued to a more normal valuation.

This situation is still fraught with danger. Debt remains very high and the current consolidation from high oil prices may not continue. But if trading remains good, I believe that Gulf Bahri’s share price could rise strongly from current levels.

Can this commercial quality continue to grow?

My next choice is completely different. Currency Specialist register (LSE: REC) provides services to clients who need to manage their exposure to foreign currencies. It is a very profitable business, with an operating margin of about 30%.

The problem is that growth has been very weak in recent years. Between 2017 and 2020, profits were broadly flat.

Newish CEO Leslie Hill has introduced some fresh ideas and seems to have reignited the growth of the group. Revenue rose 38% to £16.3m during the six months ended September 30, while profit before tax doubled to £5.2m.

I don’t expect to maintain this rate of improvement, but brokers forecast Record earnings could rise 20% in 2022. Meanwhile, the group’s balance sheet looks very strong to me, and the stock boasts a 6% expected dividend yield.

The record looks good to me at current levels. I was thinking of buying this little stock for income and growth.

Still going strong after 157 years

Investing in old companies is not a guarantee of success. But, in my experience, companies that have been in circulation for over 100 years often have some attractive qualities. Reynolds (LSE: RNO) is one such company. This company specializes in industrial chains and gearboxes – a technology that has been developed and perfected since 1864.

Growth wasn’t always in a straight line. Major clients in mining and construction suffer cyclical downturns from time to time. The demand for some products has changed over the years. I think the shift to electric energy and renewable energy will create new challenges.

Reynolds’ revenues and profits have plummeted over the past two years, due in part to the pandemic. However, the semi-annual numbers for the six months through September 30 indicate that business is returning to growth. Revenue for the period was up 17% and adjusted operating profit was up 41%.

The forecasts of the brokers indicate that this growth should continue until 2022/23. With Renold’s stock trading at only eight times expected earnings, I’d be happy to buy shares for my portfolio.

Special mode with 6% return

Newspaper and magazine distributor Smith News (LSE: SNWS) is in exclusive mode. The company’s valuation reflects this – the stock is currently trading at four times the expected 2022 earnings and offering a dividend yield of 6.3%.

If this was a healthy, growing business, I would probably expect a P/E of 8-10 and a return of 3-4%. The problem is that newspaper and magazine sales are in a prolonged decline. These days, these things are posted online.

However, Smiths News holds a 55% share of the remaining market. This makes it large enough to be profitable and cash-generating.

The company says it already has plans to cut costs to match the dwindling volumes. The brokers who cover the stocks bought the story. They expect earnings to rise 3% next year, pricing the stock at 3.9 times expected earnings. Another large dividend is expected, indicating a potential return of 6.3%.

The main risk I can see is that the business will continue to contract unless management finds new markets for Smiths distribution services. At some point, which is hard to predict, this downturn could begin to threaten the company’s viability.

My point is that there is probably an opportunity here. For this reason, I would be happy to open a small position at Smiths News today.

Turning penny stocks?

doorstep knocker Morse Club (LSE: MCL) is steadily expanding into online lending and banking. The company focuses on customers with poor credit ratings, offering prepaid loans and debit cards.

The pandemic caused a sharp decline in revenue and profits, but Morse now appears to be on its way to recovery. The group’s loan book rose 8.5% to £60.3m in the six months to August 28, while pre-tax profit for the period rose from £2.3m to £2.6m.

This business will face ongoing regulatory risk, in my opinion, as I expect the rules on lending to bad credit will continue to be tightened. The effect of this may be that Morsi’s profitability will be lower in the future.

However, Morses Club has a proven track record of success in this sector and a large market share. Earnings are expected to rebound in 2022/23, leaving stocks at only six times expected earnings. At this level, I see this small stock as a potential buy.

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