Estate agents

As a quick reminder, Foxtons is London’s leading estate agency. It currently has approximately 50 interconnected branches throughout the city and a workforce of over 1,000 employees. The Foxtons website receives nearly 10m visits per year.

A penny stock is one that trades for less than £1, Foxtons shares are currently trading for 40p. At this time last year, the stock was trading for 54p, which is a 25% decline over a 12-month period.

A penny stock with risks

One of the biggest risks I see with Foxtons shares is the action the Bank of England (BoE) is taking to combat soaring inflation. The BoE has increased the base interest rate, which means mortgage payments are now higher too, and obtaining a mortgage is also more difficult. London house prices have always been higher than average but it seems buying a property there is harder than ever. Some even anticipate a housing crash could be on the horizon. Even a bear housing market could impact a business like Foxtons.

Next, Foxtons has impressively grown into London’s leading agency but the national market in the UK is vast. Foxtons does not have much of a presence outside London, which means it is heavily reliant on a market that is saturated and where competition is growing every day. Competition and a lack of diversification in terms of location could hurt performance and returns.

The bull case and my verdict

So to the positives then. I saw that Foxtons has a decent track record of performance. I am aware that past performance is not a guarantee of the future, however. Looking back, it has grown revenue three out of the past four years, with the pandemic-affected 2020 seeing a small dip in levels.

Next, Foxtons’ growth story to date is a positive point too. The London housing market is vast and lucrative, so to be able to navigate its way to the top of this is impressive. House prices in London are statistically higher than the rest of the country. This tells me that there is lots of money to be made for estate agents and Foxtons could leverage its position to profit here. This would boost its balance sheet and potential returns too.

Finally, Foxtons shares currently pay a dividend that would boost my passive income stream. Its current dividend yield stands at just over 1.2%. A penny stock that pays a consistent dividend is not easy to find. I am aware, however, that dividends are never guaranteed.

Overall, I would be willing to open a small position in Foxtons shares. Its unrivalled position in the London market is a big factor in this, as well as the passive income opportunity. As a penny stock, I am expecting some volatility, especially currently due to macroeconomic headwinds.

Superdry

Superdry (LSE: SDRY) is a clothing company. It designs, produces, and sells clothing items and accessories. This is done primarily under the Superdry brand. With the Superdry share price down by 35% this year, a huge director transaction was executed. The purchase of a large sum of shares could boost investor sentiment.

• Name: Julian Dunkerton
• Position of director: Chief Executive Officer
• Nature of transaction: Acquisition of shares
• Date of transaction: 27 May 2022
• Amount purchased: 1,805,172 @ £1.42
• Total value: £1,144,954.58

Foxtons

Second on the list of director dealings is Foxtons (LSE: FOXT). The firm is a British-based estate agency. Foxtons serves as a go-between to buy, sell, and let properties. The Foxtons share price has had a slight hiccup this year, down 5%. A high-ranking director took the opportunity to purchase a substantial amount of shares.

• Name: Nigel Rich
• Position of director: Chairman
• Nature of transaction: Acquisition of shares
• Date of transaction: 30 May 2022
• Amount purchased: 140,000 @ £0.39
• Total value: £54,180

Big Technologies

Last on the list of director dealings is Big Technologies (LSE: BIG). Big Technologies provides products and services to the remote and personal monitoring industry. It does so under the Buddi brand name in the United Kingdom, Australia, the US, and Colombia. Its share price is firmly in the red at -15% this year. However, this didn’t stop a top director from transferring a number of leftover shares to his self-invested personal pension (SIPP) account after buying and selling.

• Name: Daren Morris
• Position of director: Chief Financial Officer
• Nature of transaction: Acquisition of shares
• Date of transaction: 27 May 2022
• Amount purchased: 10,000 @ £2.91
• Total value: £29,100

• Name: Daren Morris
• Position of director: Chief Financial Officer
• Nature of transaction: Disposal of shares
• Date of transaction: 27 May 2022
• Amount sold: 10,000 @ £2.83
• Total value: £28,300

• Name: Daren Morris
• Position of director: Chief Financial Officer
• Nature of transaction: Acquisition of shares
• Date of transaction: 30 May 2022
• Amount purchased: 15,000 @ £2.82
• Total value: £42,300

• Name: Daren Morris
• Position of director: Chief Financial Officer
• Nature of transaction: Disposal of shares
• Date of transaction: 30 May 2022
• Amount sold: 15,000 @ £2.81
• Total value: £42,150

Types of shares in a SIP

To provide context, there are a few types of shares within a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to flexibly award equity to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this instance, partnership shares were bought and sold from the deals listed. Employees are usually allowed to buy shares on a monthly basis through a SIP. But they can also buy shares at the end of an ‘accumulation period’. If there is one in effect, employees can buy shares at the market value either at the beginning or end of the period.

London’s leading estate agency

Originally founded in 1981 in Notting Hill, London, Foxtons has grown to be London’s leading estate agency. It has over 1,000 employees working at 50 interconnected branches strategically located throughout the city. The Foxtons website receives approximately 10m visits a year.

A penny stock is one that trades for less than £1. Foxtons shares are currently trading for 36p. At this time last year, the shares were trading for 59p, which is a 38% drop over a 12-month period.

The demand for housing in the UK is currently outstripping supply. In recent months, macroeconomic headwinds such as soaring inflation, rising interest rates and costs have impacted the average citizen’s pockets. It has also impacted the housing market with mortgage rates increasing and house prices shooting up too.

For and against buying the shares

FOR: Foxtons’ rise to become London’s premier estate agent is quite the achievement, in my opinion. The business has grown exponentially, and in a saturated market too. I believe this competitive advantage is a unique selling point. Furthermore, the shares would offer me a passive income stream through dividends. The shares yield just under 2%. Of course, dividends are never guaranteed, but a penny stock with a yield close to 2% is enticing.

AGAINST: The Bank of England (BoE) has taken unprecedented steps in recent months to curb rising inflation by raising interest rates. This means that mortgage rates are increasing too. This is not good news for buyers in the market because with prices high, and mortgages offering higher rates, it may not be financially viable to buy just now. This would impact a business like Foxtons too.

FOR: What about Foxtons performance? Well, looking back, 2021 full-year results showed improvement from the pandemic-affected 2020 results. The penny stock reported that revenue increased for the year ending December 31 2021, compared to the same period last year. I do understand that past performance is not a guarantee of the future, however. Coming up to date, a Q1 update released last month made for good reading with overall revenue increasing 8% compared to Q1 last year. Sales revenue was down marginally but lettings revenue increased by 21%. Positive performance could underpin further dividend payments as well as send the shares upwards.

AGAINST: Another concern I do have with Foxtons is that despite its market dominance in London, it is still a relatively small property business in a very large lucrative nationwide and worldwide market. There is every chance that competition could muscle in on its London market share and this could affect any shares.

A penny stock I’d buy

Overall I like the look of Foxtons shares. The recent stock market correction has placed pressure on the shares and made them even cheaper. I’d add a small number of the shares to my holdings and batten down the hatches given the macroeconomic issues set to batter the majority of the housing market. In the long run, however, I think the shares could provide me with decent levels of returns.

Cineworld share price outlook 

Fundamentally, the company is fighting for survival. It has a tremendous debt pile, which could take decades to clear, and management is currently locked in a legal battle with Cineplex. 

The Canadian cinema operator is seeking billions of dollars from Cineworld after the latter failed to consummate its deal to acquire its peer. 

Still, it is not all doom and gloom for the Cineworld share price. Thanks to an impressive slate of film releases over the past six months, the group generated positive cash flow in the last quarter of 2021. This marks a turning point for the company after nearly two years of losses and cash outflows.

Unfortunately, there is no guarantee this trend will continue. There are plenty of risks on the horizon that could hit consumer sentiment, and as a result, sales. And considering these risks, I am avoiding the Cineworld share price.

However, there is one penny stock that I would be happy to add to my portfolio in its place. 

Penny stock alternative 

When I am looking for portfolio additions, I like to focus on businesses with a competitive edge. This can be anything from a solid brand to a unique market position. Cineworld has neither of these qualities.

But estate agent group Foxtons (LSE: FOXT) does. The business exhibits some of the qualities I look for when seeking out great businesses. It has a strong brand in the London market and a recurring income stream from its rental division.

On top of these factors, it has a relatively strong balance sheet and has been spending cash to acquire peers across the UK to expand its footprint.

Admittedly this strategy has pushed the company from a net cash to a net debt position in the past three years, weakening the balance sheet. Still, the firm is highly profitable, so this debt seems sustainable. 

Foxtons stock has also slumped 50% over the past year. However, unlike the Cineworld share price, the firm’s profits have been expanding. 

An exciting opportunity 

I think this presents an opportunity for investors like myself. While the company may encounter some risks over the next 12 months, such as a property market slowdown due to higher interest rates, I think it has a strong position in the UK property market. This should enable it to navigate any challenges. 

This is why I would buy shares in the penny stock over Cineworld today. I think the rest of the market is overlooking the investment opportunity and potential for the company over the next few years.

Still, I like to own a selection of penny stocks in my portfolio to build exposure to this part of the market.

As such, here are two companies I would be happy to buy and hold for the next decade. 

Penny stocks to buy for growth

The first company I would buy is estate agent Foxtons (LSE: FOXT). I believe that focusing on enterprises operating in defensive markets is one of the best ways to reduce the risks of investing in small businesses.

The property market is not entirely defensive. But, in the UK, the property sector makes up such a large part of personal wealth it does not seem unreasonable to suggest that this industry will only grow in the decades ahead. 

With its focus on the London market, Foxtons is better positioned than many of its competitors to capitalise on this trend. Over the past couple of years, the company has been going through somewhat of a transition. After a series of strategic missteps, the group plunged to a loss in 2018. And it then lost around £30m between 2018 and 2020. 

However, City analysts expect the company to return to profitable growth in the next two years. So as the group builds on its recovery, I would buy it for my portfolio of penny stocks. 

Challenges it could face going forward include a property market downturn and higher wage costs, which would almost certainly hit profit margins. 

Premium market

Private jet broker Air Partner (LSE: AIR) is another company I would buy for my portfolio of penny stocks. 

This firm’s profits jumped 100% last year as demand for private air travel and air cargo services surged. Management is using last year’s windfall to fund acquisitions, expanding the company’s footprint. 

The growth strategy should help the enterprise grow its top and bottom lines as we advance. Further acquisitions could be on the cards, and as the business expands, I think the corporation will achieve substantial returns for investors over the next decade. 

That said, air travel is a cyclical industry. Air Partner is trying to expand into more predictable sectors, such as safety, but its primary business of organising planes for wealthy customers still dominates. This suggests the company’s profits could collapse in an economic downturn. 

Despite this risk, I am optimistic about the potential. With a debt-free, cash-rich balance sheet, it has the financial flexibility to acquire more businesses and expand its footprint. There is also the potential for additional shareholder returns as profits expand and cash flow grows. At the time of writing, the stock offers a dividend yield of 2.8%. 

With that in mind, one penny stock I believe could be a good buy for my portfolio in 2022 and beyond is Foxtons Group (LSE:FOXT). Here’s why.

Meteoric rise

Foxtons is an estate agency originally founded in 1981 in Notting Hill, London. It has grown to be London’s leading estate agency with multiple branches throughout the city and it’s website receives approximately 10m visits a year.

Penny stocks trade for less than £1. As I write, Foxtons shares are trading for 40p. A year ago, the shares were trading for 48p, which is a drop of 16% across a 12-month period. It is also worth noting that the Foxtons share price has returned to its pre-pandemic level, which was 90p just before the market crash in 2020.

Why I like Foxtons

Firstly, Foxtons has a strong competitive advantage due its profile and brand recognition. The London property market is very saturated so establishing itself as the leading estate agent in the city is a remarkable achievement in my eyes. It also continues to grow and open new branches throughout the city to capitalise on the current booming market.

Right now, the housing market is booming and Foxtons is benefiting. The government’s stamp duty holiday aided this boost. Foxtons is also shrewd as it understands that buying and selling houses can be profitable, but it is also cyclical. The boom may not last for long or may disappear and re-emerge. To combat this, it also has a burgeoning lettings division. Buying property in London is tough due to high prices, therefore lettings are on the rise. Foxtons can take a slice of rent from lettings properties it manages, which is a guaranteed form of revenue.

Foxtons also recently completed an acquisition of smaller competitor, Douglas and Gordon. This will also help boost its revenue. I like when a company acquires a competitor to enhance their profile and offering. This is a statement of intent when it comes to boosting growth and performance, especially for a penny stock with less financial clout.

Speaking of performance, at the end of October, Foxtons released an update for the nine months ended 30 September. These results were positive. Group revenue increased 50% compared to 2020 levels and 24% compared to 2019 pre-pandemic levels, which is impressive. Each of its segments — lettings, sales, and mortgage brokering services — saw increased performance compared to 2020 and 2019 levels.

Penny stocks have risks too

Foxtons is still a relatively small business and the property market is a huge machine with many cogs. A larger competitor with more financial muscle could eat away at its market share if it wanted to do so. Furthermore, the housing market is cyclical as mentioned. Any downturn or negative news could affect performance.

Overall I feel Foxtons would be a good addition to my portfolio in 2022 and I would add the shares to my portfolio at current levels. It possesses a good competitive advantage, has made the most of the recent boom, and is taking steps to grow even more. I would buy the shares and hold them for a long time.

Right now, one company I believe ticks all of these boxes is the estate agent group Foxtons (LSE: FOXT).

Drawbacks of buying penny stocks

Before I go on, I should highlight the risks of buying penny stocks. With a market capitalisation of less than £150m, Foxtons is a relatively small business. As such, the company could lack the checks and balances that tend to be in place at larger enterprises. 

I am comfortable with this, but other investors may not be. It could expose them to significant risks, which are not present in blue-chip stocks.

Further, Foxtons may have trouble raising money if it runs into financial difficulty due to its smaller size. There is also the potential for corporate governance issues as smaller companies may lack the management oversight that tends to be in place at larger enterprises. 

Still, despite these risks and challenges, I am encouraged by the group’s outlook for the next decade. 

Booming market

Foxtons is currently taking advantage of the buoyant housing market. Group revenue for the nine months to the end of September increased 50% compared to 2020 levels and 24% compared to 2019 levels. 

Buying and selling houses can be a profitable venture. It is also quite cyclical. To help reduce the cyclical nature of the business, Foxtons has been beefing up its lettings division. Lettings can provide a more predictable revenue stream as the group takes a slice off every monthly rental payment.

To that end, Foxtons recently spent some of its pandemic windfall on acquiring Douglas & Gordon, which bought with it a substantial lettings portfolio. Thanks to this acquisition, lettings revenue increased 28% for the nine months to the end of September. Lettings revenue totalled £58m for the period, including a £7.1m contribution from the acquisition. 

Predictable markets

Looking for investments to buy and hold, I focus on companies that operate in predictable markets. Property falls into this category. Even though the market is cyclical, people will always be buying and selling houses. There will also always be a need for rental properties. 

As such, I think Foxtons has somewhat of a defensive nature. These are the reasons why I would buy the company for my portfolio of penny stocks, to hold until 2030. 

I think the group has significant growth potential over the next few years. By reinvesting its pandemic windfall into acquisitions, management should be able to build a recurring revenue stream, which could justify a higher valuation for the stock. This would reduce the cyclical nature of the business and could potentially lead to higher investor returns. 

With that in mind, here are three companies that stand out to me as undervalued growth opportunities. 

Shares to buy for growth

The first company I would buy for my portfolio is the estate agent group Foxtons (LSE: FOXT). This organisation is currently riding the UK housing boom and investing windfall profits in further growth.

For the six months to the end of June, group adjusted operating profit hit £5.2m, a substantial improvement on the £0.9m reported for the first half of 2019. In fact, this is the first time the company has reported a sustainable profit since 2017. 

During the first half, the group also acquired Douglas & Gordon Estate Agents for £14.3m. This deal substantially increased Foxtons’ lettings business, bringing a total of 2,900 tenancies onto the books. This should provide a more sustainable, recurring income stream for the enterprise in the future. 

As well as acquisitions, Foxtons is returning some of its windfall to investors with share repurchases and dividends. Analysts have pencilled in a dividend yield of 1.7% for the stock next year. 

Some risks the group may face as we advance include higher interest rates, which could lead to a property market downturn. Further regulations for the rental market may also increase costs and dent profitability. 

Despite these potential headwinds, I think Foxtons is one of the best UK shares to buy today and would acquire the stock for my portfolio. 

A champion of UK shares

Another company that seems to be firing on all cylinders is Bloomsbury Publishing (LSE: BMY).

The leading independent publisher has benefited from a renewed interest in reading during the pandemic. Revenues during the first half of 2021 jumped 29%, and profit before taxation increased 265%. 

The company’s largest division is its consumer books business, which makes up around two-thirds of revenue. However, management has ambitious plans to grow the group’s non-consumer, academic and professional books business substantially over the next few years.

In particular, management is targeting revenues of £15m for the Bloomsbury Digital Resources business in the 2021/22 financial year and growth of 50% over the following five years. 

This expansion should help support growth from the consumer business, which is being complemented by acquisitions. Indeed, during the first half, Bloomsbury acquired publishing peer Head of Zeus. The deal bought with it the rights to the Sunday Times bestseller The Wolf Den by Elodie Harper. 

As well as Bloomsbury’s growth potential, I am also excited by the stocks dividend yield. It currently stands at 2.7% and is supported by cash on the balance sheet of £44m. Those are the reasons I would buy the stock today.

Challenges the organisation may face include rising costs due to inflation and threats from online as well as international competition. Both of these headwinds could weigh on growth. 

Foxtons’ performance could improve

The first is the London-based real estate agent Foxtons (LSE: FOXT), which has so far shown good recovery. For the half year ending 30 June, the company swung back into profits after two successive years of losses. This implies to me, that not only did it get over the pandemic quickly, it also appears to be resolving the issues dragging it down earlier. Its revenues showed a good recovery as well. 

However, the company’s share price has not shown a meaningful pickup since. In fact, over the past year it has risen by less than 20%. The answer for this is not hard to find. It expects the second half of the year to be impacted by the rollback of the stamp duty holiday, though it believes that a sustained recovery is possible nevertheless. I like the penny stock, but based on its past financial history and some dip in demand for its services possible in the near future, it is on my watchlist for now. 

Impressive share price rise

Building products distributor SIG has fared better, share price wise, in the past year. It has doubled since last September. Even six months ago, it was fairly evident that its share price can rise more. However, I will buy it only if it can continue to perform now. And I am not sure it will going by its share price drop over the last four months. Also, while its revenue numbers have improved  for the half year ending 30 June, on a reported basis, it is still loss-making. It has been facing material shortages as well, that may tell on its second half performance. It does expect underlying profits to be ahead of previous expectations, but that is a wait and watch for now. Much like Foxtons, it is on my watchlist for now. 

Commercial property may benefit

BMO Commercial Property Trust is the third on my list of penny stocks to consider buying. It just about makes the cut, with its share price just shy of 100p as I write. Its share price has risen by a very healthy 62% over the past year. As per its latest trading update for the period from 24 June to 1 September, the company collected 90% of its billed rent, which looks healthy considering the challenging environment, especially for commercial properties, since the pandemic started. I also like that since it focuses on commercial space, it will not feel the impact of the stamp duty holiday ending. In fact, property valuations could also rise as the economy picks up pace and office space is in greater demand as people head back to offices. 

However, its financials were on shaky ground even before the pandemic started, which makes me cautious. Like the other two penny stocks, it is also on my investing watchlist.

Top UK shares with competitive advantages

The first company on my list is the property group Foxtons (LSE: FOXT). This London-focused estate agent has a strong brand in the capital and around the world. This has helped it stand out from its peers in the highly competitive property market.

Thanks to the buoyant UK property market, the company recently reported its best set of first-half results since 2016. Property sales increased 86% against the same period in 2019. Meanwhile, lettings income increased 2%, while mortgage broking income increased 31%. 

I think these numbers show off Foxton’s competitive advantage and support my view that this is one of the top UK shares on the market today. That’s why I would buy the stock. 

That said, I’m not going to take the group’s growth for granted. As I noted above, the property market is highly competitive. It’s also subject to peaks and troughs, which Foxton’s has no control over. These are the two primary risks the firm faces today. 

Growth through trust

I’d also buy the UK technology group Trustpilot (LSE: TRST). The internet has revolutionised the way we live and work. Unfortunately, not all of those that have moved online are trustworthy.

Trustpilot has evolved to bridge the gap between technology and trust. I think it provides a valuable service in a world where many customers are buying from a website for the first time and may never meet a customer service representative. And as the e-commerce sector continues to grow, I think the demand for Trustpilot’s services will only expand.

Still, trust can be a double-edged sword. The company needs to ensure customers can continue to trust its reviews. If not, they may start to go elsewhere. This is probably the most considerable risk the business faces today. Maintaining the quality of reviews on its platform is paramount. 

Despite this challenge, I’d buy Trustpilot for my portfolio today. 

Storied history

The final company I’d buy is the chemicals group Croda (LSE: CRDA). With a long history of producing chemicals for different industries, the company has a solid reputation with its customers.

In a sector that’s environmentally sensitive and could be potentially damaging to its customers, particularly for the beauty industry, this reputation is more valuable than any of its services. As such, I think Croda’s primary competitive advantage is its reputation. This is the main reason why I’d buy the shares today. 

Like Trustpilot, reputation can be fickle. Croda needs to keep investing to stay ahead. If it doesn’t, the company’s growth could grind to a halt. I’ll be keeping an eye on this risk as we advance.