I’ve been drawing up a list of UK penny shares I think have good prospects for 2022. Often, if a stock trades for under a pound, it reflects the business in question having certain risks, no matter how rosy its business prospects may otherwise look.
Yet even with such risks in mind, here are five penny stocks I’d consider holding in my portfolio this year and beyond. I’d characterise them as fast-growing as each one has seen its share price rise by more than 20% in the past year. In each case, I think there might be further gains to come.
Car retailers have had a challenging couple of years, but that was truer for Lookers (LSE: LOOK) than for most of its rivals. A historic accounting scandal was uncovered at the firm, which diverted a lot of management attention and led to a restatement of past accounts.
That is now in the rear view mirror. The share price had grown 75% over the past year, at the time of writing this article earlier today. Despite that, I reckon there is continued possible upside for Lookers. A shortage of key components such as semiconductors has combined with supply chain issues to make some cars more scarce. That is good for profit margins on new cars. It has also boosted the sales price for second-hand vehicles. I think that could be good news for Lookers. In October, it upgraded its expectations for 2021 pre-tax underlying profits for.
I think the strong momentum could carry into 2022 and beyond, supporting a higher share price. But one risk the company itself has highlighted is uncertainty about vehicle availability. If carmakers cannot supply Lookers with what it wants to sell, that could hurt both revenues and profits.
Another penny share that had a fairly good 2021 was retailer Card Factory (LSE: CARD). Its shares are 55% higher than a year ago.
In its most recent trading statement, in November, the company said that it has continued its recovery from the pandemic. Its most recent quarter saw sales only 3% below 2019 levels. If the retailer can maintain its business momentum, I think 2022 could see it surpass its pre-pandemic performance. Its omnichannel model remains heavily dependent on its store estate. But with prime locations and a large customer base, I think the shops have a bright future. And if high street vacancies grow, it could be good for Card Factory’s profitability in the form of lower rents.
One risk is the company’s net debt. At the end of October it stood at £108m. That is lower than the same point the prior year, when it was £143m. But it remains high, at over half of the company’s market capitalisation. There is a risk of a future liquidity crunch, for example, if shops have to stop trading due to public health restrictions. That could badly hurt the share price.
The photobooth and vending machine operator Photo-Me (LSE: PHTM) suffered during the pandemic, as reduced visits to venues such as shopping centres saw revenues fall. It has since staged an impressive recovery. The shares are 32% up on their level 12 months ago.
That is good news for the chief executive, who was a big buyer of Photo-Me shares when they fell. He now owns over 108m shares in the company. I think it could also present an opportunity for me. That is because I think the improving performance could continue in coming years. The pandemic accelerated certain business moves that could help position Photo-Me for future growth, such as adding more contactless payment options. Business areas such as launderette machines continue to show strong growth. I expect demand to stay resilient as people always need to do their washing.
Yet continued pandemic restrictions continue in many of Photo-Me’s Asian markets. That could hurt revenues and profits.
Bus and coach operator Stagecoach (LSE: SGC) saw its shares grow 22% over the past year. A key reason for that was the announcement of a planned merger with rival National Express. The deal could be good for Stagecoach because it can cut combined costs. It also gives Stagecoach shareholders like me exposure to National Express’s national coach network.
The deal might not go ahead due to regulatory concerns about market dominance. If that happens, I still think the underlying Stagecoach business is attractive. It has deep experience in running bus services and a captive market on many routes. Some bus users who stopped travelling during the pandemic may never come back, though. That would make a big dent in revenues.
It may sound odd for a penny share to have a market capitalisation of £36bn. But, with billions of pounds in profit forecast for the company’s full-year results due next month, Lloyds (LSE: LLOY) is unlike many penny shares.
The Lloyds share price stands 40% higher than a year ago. But I think a number of factors could help boost the bank’s share price further in 2022. I am hopeful it will use its mounting excess capital to fund a dividend increase. Sustained strength in the housing market could also lead to continued strong profits at the bank, which is the nation’s leading mortgage lender. Its growing rental property portfolio may also boost profits, although I remain wary of the risk that this could divert management attention. I am also concerned that it adds assets to the balance sheet that may lose value in the event of a future property crash.
My next move on these UK penny shares
Like all shares, those that trade for pennies carry risks. That is why I always like to diversify my portfolio. I already hold three of these shares and would consider buying the other two.
While all five shares grew more than 20% last year, we don’t know what will happen in 2022. I like the business model of each company and am optimistic about their prospects. Holding all five in my portfolio would give me some exposure to their upside potential, while also mitigating the impact on my holdings if any of the companies perform poorly in the coming year.
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Christopher Ruane owns shares in Lloyds Banking Group, Lookers and Stagecoach. The Motley Fool UK has recommended Card Factory and Lloyds Banking Group. 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.