Penny stocks may offer excellent returns for my portfolio. As long as I thoroughly research the underlying businesses, I’m happy to buy and hold them for the long term.
With this in mind, I’ve been screening for penny stocks that have high earnings growth forecasts. Here are two I’m considering buying in my portfolio.
The first high growth penny stock
Accrol (LSE: ACRL) is the first penny stock I’ve been researching. It’s a manufacturer of soft tissue paper that is used in various products such as toilet roll and kitchen paper. It came up on my stock screen as the earnings per share (EPS) forecast for next year is an impressive 44%.
There’s been a turnaround situation at Accrol since the current CEO joined in 2017. The company reduced headcount and the number of products it offered, and also streamlined its supply chain. The gross margin has been rising since 2019 when it was 14.7%. It reached 27.7% in its fiscal year 2021 (the 12 months to 31 April 2021). This, to me, shows that the turnaround is working. The share price has responded too, and has risen from around 7p in 2018, to a 35p at time of writing.
However, in a trading update for the full fiscal year 2022, Accrol said it’s been impacted by rising costs for its raw materials. The company has also seen additional distribution costs related to a shortage of HGV drivers, and this has reduced its achievable revenue growth for this fiscal year. These are key risks to consider before buying Accrol shares as I don’t see the end of the current global supply chain issues just yet.
I’m not sure there’s a strong economic moat in the business either. This might weaken profits in the future if competitors are able to undercut prices of Accrol’s products. So on balance, I’m going to sit this one out for now.
A stock to buy
The next penny stock is EKF Diagnostics (LSE: EKF), a medical diagnostics company. It manufactures point-of-care testing equipment for common infectious diseases, and products for use in a laboratory. The company has also been manufacturing and distributing Covid test kits during the pandemic.
I came across EKF Diagnostic on my screen as its EPS is forecast to grow by almost 55%. Indeed, in the company’s half-year report, net profit grew by a huge 122%. The outlook statement was even better, because management said the core business is trading well. They said that the full-year results will be “comfortably ahead of already materially upgraded management expectations”.
This says to me that EPS growth may even be larger than the current forecast of 55%. Therefore, there could be significant upside in the share price from here.
I have to keep in mind that EKF Diagnostics has benefitted from the increased need for testing due to Covid. This revenue stream should decline when the virus is under control. Nevertheless, the board said the business is capable of double-digit profit growth over the next three to four years. This is beyond any Covid-related revenue.
Gross and operating margins have been increasing in recent years, too. This is a sign of pricing power in the business, in my view. I’m strongly considering this penny stock for my portfolio.