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Would I buy this fast recovering penny stock in 2022?

British Pennies on a Pound Note

The latest reading on economic growth is muted. And the Covid-19 situation is looking challenging again. It does not look quite as challenging as it was last year, but keeping both facts in mind, we need to brace ourselves for a slower recovery than we might have expected earlier. Based on this, I am re-adjusting my expectations downwards for recovery stocks. There are some, though, that I still believe could have a fair bit of upside to them. One of them is the penny stock Photo-Me International (LSE: PHTM).

Penny stock on the rise

The company’s main business is running photo-booths for pictures required for official purposes like passports and other ID cards. It also provides laundry services, kiosks for digital printing, and vending equipment for food. The penny stock faced its financial challenges in recent times, but seems to be finding its way out of the hole now. For the six months ending April 2021, it managed to clock net profits after one year of losses. And its latest trading update is positive too.  

Its trading activity was strong in the last quarter of its financial year ended 31 October 2021. Based on this, it expects revenue to be slightly higher than forecast earlier. It also expects pre-tax profits to be in the upper end of its estimates. It is little wonder then, that its share price rallied 11% when the update was released, reaching the highest level in a month. 

Unavoidable risks for 2022

This is encouraging. But there are risks too. In its outlook, the company mentions macroeconomic challenges like inflation arising from supply chain issues. Inflation is a challenge that is clearly here to stay in the next year, going by forecasts. So I think as a potential investor, it is a good idea to brace for a probable hit to its profits from it. Though, if economic activity were to reduce substantially because of another wave of the pandemic, I think inflation could ease off too. It has its own negative impact though, by directly impacting demand. 

What I’d do

So what would I do about the Photo-Me international stock? I think for now, I would wait and see how the Omicron variant situation plays out. For now, things are too uncertain to make a call on recovery stocks. Also, even before the pandemic, the penny stock was not going anywhere. If anything, over the past few years, its stock price has been broadly declining. Moreover, its earnings ratio is a significant 40 times right now. If anything, this says to me that the stock’s price could come off further, especially if the broader markets weaken. 

As such, it looks too risky for me to buy the stock for 2022. I would much rather focus on more dependable options now that could give me solid returns over the next few years. 

The post Would I buy this fast recovering penny stock in 2022? appeared first on The Motley Fool UK.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.