Here are three penny stocks that have explosive earnings forecasts for this year.

The road to recovery  

The first penny stock is Stagecoach Group (LSE: SGC). It’s a passenger transportation company operating bus routes around the UK. Pre-Covid, the shares traded around the 140p mark, but they crashed heavily in March 2020 and remain in penny stock territory at close to 77p.

But I like the potential recovery play here. In a world where staycations are more popular, Stagecoach’s bus services should be in greater demand. Vehicle mileage has recovered to 94% of 2019 levels, showing the recovery is on track.

Earnings are forecast to grow 54% this year. Next year could be even better, as earnings are expected to grow an explosive 175%.

There are risks to consider though. Any new lockdown would be a significant blow to the company. There are also negotiations ongoing over a potential merger with National Express that could disrupt normal business operations. I would have to get comfortable that this is the best thing for the business before I bought any shares.

But I do like the potential growth here.

Equipment for hire

Another penny stock I like the look of is Speedy Hire (LSE: SDY). It’s an equipment-for-hire company for the construction industry. Ashtead Group that’s listed on the FTSE 100 is the highly successful and larger company in this sector.

The SDY share price has almost flatlined for a number of years now, but was particularly volatile around the onset of the pandemic last year. The company relies heavily on the construction sector for revenue generation, so the volatility is understandable. It’s a risk to consider if we experience another lockdown as the business would suffer.

However, it’s the growth in earnings I’m most attracted to. For this year, earnings are forecast to rise 70%. In the following year, they’re still forecast to grow a respectable 21%. Of course, I have to remember that both here and with SGC, forecasts could always be missed.

I don’t think the shares are up to speed with the potential earnings growth. The current price-to-earnings ratio is only 15, which I consider good value for my portfolio given the growth potential.

Energy advice

Finally, I like the look of Inspired Energy (LSE: INSE). It’s a leading commercial energy advisor, providing insight and consultancy for UK businesses. It says such companies spend £17.7bn annually on energy, so there’s a lot of potential for cutting costs and lowering overall energy consumption. Earnings are forecast to grow 88% this year, and a not too shabby 16% the year after.

There’s a great angle on Environmental, Social and Governance investing here too, as Inspired Energy helps businesses to reduce their environmental impact.

But rising energy prices may be an issue for the firm. Smaller energy providers have gone into administration, which makes it more challenging to switch to cheaper tariffs. It’s a risk to consider before I buy the shares.

Here, I’ll look at whether it could now be the buy of the century. And whether ambitious energy consultancy Inspired Energy (LSE: INSE), which released its annual results today, could also offer rich pickings for investors.

Growth at an attractive price

Inspired supports its clients with their energy needs, including selecting the best supply contracts, validating energy invoices, meeting compliance obligations on energy and environmental reporting, and increasing effectiveness of energy consumption. In short, “optimising the value of every pound our clients spend on utilities, so that they can focus on running their businesses.”

The company today reported record revenue, with its large corporate division contributing 84% and its SME division 16%. Total revenue of £32.7m was up 24% on the prior year, helped by five strategic acquisitions. Meanwhile, pre-tax profit increased 35% and earnings per share (EPS) by 26%.

Inspired has become a leading procurement consultant to UK and Irish corporates. And in a highly fragmented market, it has considerable scope for further strong acquisitive and organic growth. I see good potential for it to become a significantly more valuable company than its current market value of £131m.

The shares opened 6% higher at 18.38p this morning, and with EPS of 1.68p, the price-to-earnings (P/E) ratio is 10.9. I reckon this is an attractive valuation, and that a 0.65p dividend (up 18%), giving a yield of 3.7%, adds to the investment appeal. As such, I rate the stock a ‘buy’.

Negative view

Centrica is a stock I’ve been bearish on for a long time. However, it’s nine months since I last wrote about it. The share price was a bit above 150p at the time, but has since sunk to a 20-year low — 116p, as I’m writing.

Nearly every stock has a price at which it offers investors good value. Could this now be the case with Centrica? Indeed, could it perhaps have become the biggest blue-chip bargain in the market?

There were a number of reasons for my previous negative view on the company. Regulator Ofgem was flexing its potentially-profit-sapping muscles, competition in the industry was intense, and Centrica’s British Gas business was haemorrhaging customers. Has anything changed since?

Improving outlook

There have been some positive developments. Customer departures slowed dramatically in the second half of 2018. This came as numerous smaller energy suppliers went bust, the cheap deals they were offering proving unsustainable. And while the regulator’s default tariff price cap, which came in at the start of this year, isn’t the best news for Centrica, I think it’s likely to be a lot worse for the smaller players.

City analysts have EPS bottoming out at 9.8p this year, followed by 20% growth to 11.8p in 2020. This gives a current-year P/E of 11.8, falling to a bargain-basement sub-10 next year. The company’s running 12p dividend (10.3% yield) may have to be rebased, as cash flow this year looks likely to be tight, but a cut appears to be already priced in.

On balance, while I don’t think Centrica is the FTSE 100 bargain of the century, I reckon the share price is sufficiently low, and the outlook sufficiently improved, to move to rating the stock a ‘buy’.

In contrast, FTSE 100 shares such as Marks & Spencer (LSE: MKS) may now offer good value for money. Certainly there are risks facing the retailer, but a low valuation may factor them in.

Therefore, it could be worth buying alongside another stock which appears to also offer a low valuation and that reported an encouraging update on Wednesday.

Improving prospects

The stock in question is energy procurement consultant Inspired Energy (LSE: INSE). Its trading update showed revenue for the 2018 financial year is expected to be 21% ahead of the previous year. Its core Corporate Division recorded sales growth of 29% and contributed 84% of group revenue. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be 24% up on the previous year, with trading having been strong throughout the year.

The company also reported that the strong momentum of 2018 has continued into 2019. It’s on track to deliver a rise in earnings of 7% this year, which suggests its recent acquisitions are performing well. With scope for further M&A activity, the business could generate an improving financial performance.

Since Inspired Energy trades on a price-to-earnings (P/E) ratio of around 10, it seems to offer good value for money too. With an improving profit outlook, it could  be a strong performer over the long term.

Changing business

As mentioned, the Marks & Spencer share price could offer good value for money. Even though investor sentiment has picked up since the start of the year, it continues to trade on a P/E ratio of just 11.3. This suggests investors may have factored in challenges, such as weak consumer confidence and Brexit risks, with the changes being made by the company having the potential to boost its financial performance in the coming years.

For example, M&S is expected to move into the online grocery segment. This could improve its omnichannel capabilities, while investment in the fundamental parts of its business could lead to a stronger competitive advantage versus industry peers. And with it changing its pricing structure to focus on everyday low prices rather than one-off deals, it could generate improving sales growth over the medium term.

While the stock may have an uncertain future, so too does buy-to-let. And with property prices compared to incomes being at their highest ever level, there seems to be limited scope for further significant capital growth – especially with interest rates due to rise over the next few years. In contrast, Marks & Spencer could become a strong recovery stock under what appears to be a sound growth strategy.

Capital-intensive operations

Although SSE shareholders will own their own little chunk of the de-merged operations, I still reckon all this change is unsettling, and judging by SSE’s lacklustre share-price chart, the market agrees. However, I’ve been rethinking my opinion about owning shares of companies involved in producing energy altogether. These days, I’m no longer as certain that such businesses are as defensive as I once thought. The sector is characterised by capital-intensive operations, which often leads to high debts and thin dividend cover. On top of that, firms like SSE seem to be vulnerable to weather events and other factors that can make their profits and cash inflows behave more like cyclical companies than defensives.

Just this July, SSE told us that “dry, still and warm” weather has led to lower-than-expected output of electricity from renewable sources, lower volumes of energy being consumed, and a higher cost of electricity and gas. The bottom line is that operating profit in the first quarter of the trading year came in around £80m lower than expected. It seems to me that SSE has a lot of risk in its operations and I think it’s possible to invest better elsewhere.

An energy firm minus the hassle of owning energy assets

Rather than betting on SSE and having your capital tied to the nuts and bolts of producing energy we can instead invest in a firm that skims a profit from energy use without risking capital on producing the stuff. I reckon energy procurement consultant Inspired Energy (LSE: INSE) fits the bill nicely because it acts like an agent connecting suppliers with customers. Well-known fund manager Mark Slater has a chunk of his fund’s capital in the stock, which is encouraging because he has a decent track record in investing.

Today’s half-year results are good. Revenue came in 33% higher than the equivalent period last year, cash from operations shot up 43% and adjusted diluted earnings per share moved 13% higher. The directors pushed up the interim dividend 19%, which I take as a message that they are confident in the outlook. Reading through today’s report, I get the strong impression that the management team is going for growth in a determined way. So far, financial progress has been achieved both organically and via an acquisition strategy and both methods look set to continue.

The current share price around 20.65p leads to a forward price-to-earnings rating for 2019 of just over 12 and the forward dividend yield runs around 3.5%. I think the valuation is undemanding and the stock looks attractive given the firm’s growth potential.

Growing order book

These double-digit growth numbers are in line with the directors’ expectations, and the share price has put on around 54% since the beginning of the year to stand at today’s 20p, which reflects the firm’s progress. Looking forward, the order book is around 60% higher than a year ago, which suggests more good performance ahead. The directors expressed their confidence in the outlook by raising the interim dividend 23%.

Chief executive Janet Thornton reckons the growth in the order book is organic as well as via the firm’s vibrant acquisition programme. During the period, it completed two bolt-on acquisitions and announced a third, a company called Horizon, after the first-half period ended. Horizon is based in Ireland, and the directors aim to build on operations there with the aim of making Inspired Energy a market leader in Ireland. Such potential international expansion suggests growth could have much further to run.

Strong forecasts for earnings growth

City analysts following the firm estimate that earnings will increase 16% during 2017 and 16% in 2018, which looks attractive if they are correct. Meanwhile, today’s 20p share price throws out a forward price-to-earnings (P/E) rating just under 12 for 2018 and a forward dividend yield running at almost 2.9%. Those forward earnings should cover the payout a healthy-looking three times, which is generous cover consistent with the directors’ apparent view that plenty of ongoing opportunities exist to invest in the business for further growth.

Inspired Energy is delivering well on growth and it’s hard to make a case that the shares are expensive. I find the stock attractive and would rather take my chances on the firm’s ongoing growth story than with a business that looks like it has gone ex-growth such as telecoms provider BT Group (LSE: BT.A).

No quick fix

Back in January, BT’s shares crashed by 25% when news of an accounting scandal in the firm’s Italian division broke. Back then, I was optimistic that the problems would be quickly fixed and that the shares would soon bounce back. However, seven months later the stock now looks as if it is in a gradual downtrend and I’ve turned bearish on the firm.

In July, first-quarter results revealed adjusted earnings per share down 5%, and BT talked about its restructuring programme and plans to streamline its Italian business. Meanwhile, City analysts watching BT don’t give us much to get excited about. They expect earnings to decline 6% during the year to March 2018 and to rise just 3% the year after that.

I wouldn’t describe BT’s shares as ‘expensive’. At today’s share price around 292p, the forward P/E ratio for the year to March 2019 is just over 10, and the forward dividend yield runs at a little over 5.7% with the payout covered almost 1.7 times by forward earnings. However, I’m not keen on waiting for a recovery in growth to materialise and think that the dividend yield could be vulnerable because of the cyclical element in the firm’s business.

Based on such good trading, I reckon there’s around 25% immediate upside potential in each share price to get the valuations to a ‘fair’ level. 

What they said

On Tuesday, commenting on a first quarter that saw FTSE 250 constituent Britvic deliver 4.3% revenue growth and a 3.9% uplift in volume year-on-year, chief executive Simon Litherland seemed happy. He said: “All our key markets have delivered revenue growth…we are confident that the strong execution of our marketing and innovation plans combined with disciplined revenue management and our cost saving initiatives will deliver full-year results in line with market expectations.”

Meanwhile, AIM-listed Inspired Energy delivered an end-of-year trading update Monday trumpeting a 40% revenue gain, a 45% surge in earnings before interest, tax, depreciation and amortisation (EBITDA), and an order book that has swollen by 14% during 2016.

The firm has grown both organically and by acquisition and chief executive, Janet Thornton said: “Inspired had a very strong 2016 in which the business delivered on its stated growth strategy…  We continue to seek out attractive acquisitions and I am confident that 2017 will be another year of positive growth.”

Valuations 

At a share price of around 632p, Britvic’s forward price-to-earnings (P/E) rating runs around 12.5 for the year to September 2018 and there’s a forward dividend yield of 4.1% or so. City analysts following the firm expect earnings per share (EPS) to lift by 5% during 2018.

With its share price of 13.25p, Inspired Energy’s P/E rating sits at just over 10 for 2017 and the dividend yield is projected to be 3.8% that year. Growth looks strong with analysts anticipating a surge in EPS of 19% during 2017.

Given the defensive nature of Britvic’s business, I’d expect the firm to trade on a much higher rating. Comparing to other soft drinks suppliers, such as Nichols with its P/E rating around 23 and AG Barr at 17 or so, it seems clear that investors expect less growth from Britvic. However, I reckon the company could surprise to the upside on growth over the next few years and a valuation re-rating upwards could materialise for the stock.

Meanwhile, Inspired Energy’s valuation seems conservative given the growth figures the firm keeps posting.

What’s a normal valuation?

In my view, the market is being unfairly cautious on these two firms because both are trading well with apparently good prospects for further growth down the line. 

The median forecast P/E rating of all stocks with forward estimates for earnings runs around 14 on the London stock market. Re-rating to that level would see Inspired Energy put on more than 25% and if Britvic re-rated to match its peer AG Barr, the shares would rise by more than 25%. 

If good trading continues and earnings keep increasing, we could easily see share price gains from here, and there’s the comfort of a decent dividend in each case while we wait.

Turnaround on track

Dividend cuts, a shock fundraising and a volatile share price aren’t the type of things investors expect from a ‘boring’ FTSE 100 utility. But that’s exactly what we’ve seen from Centrica in the past couple of years.

The company’s strategy under Sam Laidlaw (chief executive from 2006 to 2014) was to expand the group’s upstream business, an area in which Laidlaw had considerable experience. This strategy worked well for a while, but the underlying risk of un-utility-like volatility from substantial upstream operations was brutally exposed by the collapse of oil and gas prices over the last couple of years.

Current chief executive Ian Conn is in the process of reducing Centrica’s upstream operations and restructuring the company “for customer-focused growth.” As such, ‘new’ Centrica’s earnings, dividends and share price should start behaving more in the relatively steady manner that investors expect from a utility.

In half-year results last month, the company reported “encouraging” progress on implementing its strategy, and increased its cost savings target for 2016 to £300m from £200m. The company’s turnaround looks to be gaining traction, although analysts don’t expect earnings growth to resume until next year.

However, based on the forecast growth, Centrica could prove to be a decent buy at a current share price of 234p. A forward price-to-earnings (P/E) ratio of 14.5 and a prospective dividend yield of 5.4% are attractive for a steady utility — which, of course, is what Centrica is aiming to be.

Growth prospect

Inspired Energy today reported a “strong performance” for the first half of the year, “delivering record growth on all fronts.”

Revenue was 56% higher than in the first half last year at £10.2m from £6.5m. Cash generated from operations was up 34% to £2.55m from £1.91m. Meanwhile, the procurement corporate order book — “which provides strong visibility of revenues and is a consistent guide to the future performance of the [core] Corporate Division” — increased by 69% to £25.7m from £15.2m.

The growth was boosted by two acquisitions in the second half of last year, but the performance is pretty impressive all the same. The acquisitions have been integrated on target and within budget and management is investigating further opportunities to “participate in industry consolidation.”

The criteria management has set for acquisitions look eminently sensible to me and combined with organic growth momentum suggest this business could have a bright future. Major shareholders — who include key directors and notable small-cap institutional investors Miton Asset Management, Hargreave Hale and Slater Investments — would appear to agree.

The shares are trading at 13.75p, and with 480,215,860 shares in issue, the market capitalisation is £66m. I can see little in the way of coverage by City analysts, but annualising the first-half earnings per share of 0.62p gives an attractive full-year P/E of 11.1, and — with year-on-year earnings growth of 24% — an equally attractive price-to-earnings growth (PEG) ratio of 0.46. With a dividend yield in excess of 3% to boot, I rate the stock a buy.

In case you don’t know, Mark Slater is Jim Slater’s son and he’s just as savvy as his father.  Jim Slater’s Zulu Principle method of stock picking is no doubt an influence. But Mark Slater has built up a robust investment record on his own account over several years, through his fund managing investment business Slater Investments Ltd.

A capital-light business model

Alliance Pharma aims to acquire, license and distribute pharmaceutical and healthcare products. The firm reckons it looks for underlying sales stability and growth potential before making an acquisition and has 30 such deals under its belt since 1998.

A big part of the company’s strategy is to outsource capital-intensive activities such as manufacturing, warehousing and logistics to what the firm describes as ‘class-leading’ specialists. Alliance Pharma then distributes its products through wholesalers, retail pharmacies, hospitals and an international network of distributors.

That strikes me as a potentially efficient business model, and Alliance Pharma has a record of profits over the last few years, although the rate of profit growth has been a bit lumpy.

At today’s share price of 49p, Alliance Pharma trades on a forward price-to-earnings (P/E) multiple of just under 14 for 2016 and has a forward dividend yield of 2.5%.

A growing media empire

STV Group describes itself as Scotland’s leading digital media brand. The firm reckons its programmes reach 3.6m viewers each month. They include shows such as Emmerdale, Coronation Street, The X Factor, Britain’s Got Talent and Antiques Road Trip, alongside what the company claims is the most comprehensive local news service in the UK. 

STV says its production arm has ambitious plans for domestic and international growth. Earnings have been climbing steadily over the last few years, and at today’s 505p share price the forward P/E rating runs at around 11.5 for 2016. Meanwhile, there’s a forward dividend yield on offer of 2.4 % or so, with the payout covered around 1.8 times by City analysts’ estimate of forward earnings.   

If STV can realise the potential of its expansion hopes, the present valuation seems reasonable.

Energising growth
                  
Inspired Energy describes itself as one of the largest energy consultants in the UK. The firm provides a range of energy advisory services and intelligent energy solutions to the industrial and commercial sector. Operations include buying strategies, market intelligence, negotiation and contract management solutions, all developed according to client-specific needs, the firm says. That sees the company involved in energy procurement, market analysis, historical audits, energy management, bureau services and renewable energy projects.

Business has been brisk and the firm sports an impressive record of earnings’ growth over the last five years or so. Today, with the shares at 13.75p, Inspired Energy trades on a forward P/E ratio of just over 12 for 2016 and promises a 2.5% dividend yield. Forward earnings look set to cover the payout a healthy 3.2 times, suggesting the directors see plenty of potential for further expansion from here.

A steady big cap can deliver solid dividend gains and maybe a little capital growth to stabilise the foundations of my investment strategy, while a growing small cap can spice up returns when the underlying business clicks.

With such a strategy in mind, I’m looking at Rio Tinto (LSE: RIO) and Inspired Energy (LSE: INSE) to see if they can make a great combination when held together.

Performing well

Inspired Energy ticks the box for excitement and strikes me as a good candidate for the small-cap side of this investment strategy. The firm describes itself as one of the largest energy consultants in the UK, and reckons it provides a range of essential energy advisory services and intelligent energy solutions to the industrial and commercial sector. The company’s business involves buying strategies, market intelligence, negotiation and extensive contract management solutions, based on client-specific needs.

Inspired Energy seems to be something of a sales-driven organisation working on commissions. That kind of service is essential for time-strapped organisations that want to outsource their energy procurement needs. Service firms such as Inspired Energy can become experts about what is available in the market — perhaps to a level that one-off buyers would find difficult to achieve on their own.

The business model is certainly performing well for Inspired Energy. Revenue, profits and cash flow have all grown well:

City analysts following the firm expect earnings to grow just 1% this year with a 19% surge during 2016. Meanwhile, at today’s 12.62p share price, the forward dividend yield runs at 2.8%, and those earnings should cover the payout more than three times. That’s a healthy level of cover, which suggests to me that the directors see plenty of potential for further growth, otherwise they might return more free cash to investors through the dividend rather than reinvesting it into the business.

Inspired Energy’s forward price-to-earnings (P/E) ratio sits below 12, which seems undemanding if growth is set to continue. To me, the company is well worth further research.

Ramping up production. Is that risky?

Big miner Rio Tinto continues to ramp up production even as commodity prices fall. The firm earns around 90% of its profit by producing iron ore, and the recent third-quarter results release revealed iron ore production up 11% on the figure achieved nine months previously. However, when I look at the long-term price chart for iron ore, the high prices of the last ten years look like a bubble.

People often say that the cure for low commodity prices is low commodity prices — meaning that low prices encourage producers to shut down production to reduce supply. When supply reduces and demand remains stable, prices should rise. Rio Tinto seems to be doing the opposite, though. The firm’s chief executive said:

“We continue to deliver efficient production, rigorous cost control and sound allocation of capital. This approach is ensuring that our tier one assets generate substantial free cash flow even during a challenging economic environment.”

I hope he is right, but what bothers me is that iron ore’s current price of around $52 dollars per metric ton is still almost four times the level it was at the end of 2003, just 12 years ago. To me, there is considerable scope for the price of the base metal to halve from here and maybe stay there for decades. If that happens, it could wreak havoc with Rio Tinto’s ability to turn a profit and the share price could fall a heck of a lot more from here.

I hope I’m wrong, but I see Rio Tinto and the other big mining outfits as risky propositions right now. So Rio Tinto doesn’t make it as a ‘defensive’ big cap to complement this particular two-pronged investment strategy.

The deal fits in with Stride Gaming’s strategy of seeking out multiple small online gaming companies and, since it listed on the stock market in May 2015, its share price has now soared by almost 50%. And, with it continuing to diversify its brands and take advantage of appealing valuations across the sector due to increasing regulation, Stride Gaming could continue to be a strong performer over the medium term.

Also announcing an acquisition today is energy procurement business Inspired Energy (LSE: INSE). It has paid £2.75m for Blackpool-based Wholesale Energy, with the deal being made up of £1.5m in cash plus a further £0.5m in shares that will be crated by a placing that has also been announced today. And, should Wholesale Energy meet specific targets, a further £0.75m will be paid in future.

The deal has been positively received by the market, with Inspired Energy’s share price rising by 4% and, with the acquisition adding service specialism and increasing Inspired Energy’s customer base, it is likely to have a positive impact on its financial performance. In fact, Inspired Energy is forecast to increase its earnings by as much as 11% next year and, with its shares trading on a price to earnings (P/E) ratio of 12.6, it appears to offer good value for money – especially since it has a strong track record of profit growth in recent years.

Meanwhile, e-learning services provider Learning Technologies (LSE: LTG) has also announced an acquisition today, with it buying Eukleia Training for £7.5m, with £6m to be paid in cash and £1.5m in shares. As such, Learning Technologies will conduct a £7.5m placing, with the surplus capital to be used for future acquisitions.

Although shares in Learning Technologies have fallen by 3% today, the deal seems to make sense for the company. That’s because it provides Learning Technologies with additional scale and exposure to the government, risk and compliance marketplace, which is very much a growth market. And, with Learning Technologies forecast to increase its bottom line by 16% in the current year and by a further 17% next year, investor sentiment could be positively catalysed in the short to medium term.

That’s especially the case since the stock still trades on a price to earnings growth (PEG) ratio of 1.6, which indicates that there is substantial scope for capital gains in future.