Owning penny stocks can sometimes be a stressful experience for investors. Their share prices can be prone to bouts of extreme volatility. What’s more, often than not, they have weaker balance sheets than larger UK shares. This can, theoretically, leave them in more danger of failure.
That said, I believe penny stocks can also allow investors to stock up on excellent growth businesses at little cost. With some decent research, there’s a great chance of avoiding the high-risk stocks and digging out the stars of tomorrow.
Here is a soaring penny stock I’d buy for my own portfolio.
Card Factory
Budget greetings cards and gifts retailer Card Factory (LSE: CARD) leapt 6% on Tuesday, thanks to news that full-year profits beat expectations. It is now trading around 62p per share.
For the 12 months to January, the penny stock’s recorded pre-tax profits of £11.1m, having made a loss of £16.4m a year earlier.
The market was pleased at the level of profits at Card Factory which came despite “significant trading disruption and inflationary cost pressures”.
Revenues soared 28% year-on-year to £364.4m as the business was helped by store re-openings following Covid-19 lockdowns. The UK retail share was also boosted by e-commerce sales that were “significantly ahead of pre-pandemic levels” as well.
Online sales were up 135% on the 2020 financial year, Card Factory said.
Why I’d buy this penny stock
Cost pressures are likely to remain a big issue for the retailer for the foreseeable future. Paper costs are rising while increasing energy bills are another threat to profits.
Still, I believe this threat is outweighed by the exceptional sales opportunities it has in the current climate.
Growing stress on shoppers’ budgets means that demand for the lower-cost products it sells could shoot higher. People aren’t going to stop sending cards and celebrating special occasions in these tough times. They’ll simply switch down from more expensive retailers.
I also like the steps Card Factory has taken to improve its digital proposition and to boost its online product ranges. This will stand it in good stead as UK shoppers increasingly shop on the web.
Data giant Ascential thinks 38% of all retail sales will take place online by 2026. That compares with 32% in 2021.
Too cheap to miss?
I also like Card Factory because of its excellent value for money. Despite today’s share price gains, the penny stock trades on a forward price-to-earnings (P/E) ratio of 8.7 times. This is comfortably inside the generally-regarded bargain watermark of 10 times and below.
City analysts think Card Factory’s earnings will soar 169% in this financial year. They expect another 49% bottom line increase in financial 2024 too. I think earnings could continue rising strongly beyond this forecasted period too, making this a top UK share to buy in May.