Cleaning and hygiene

McBride is the leading European manufacturer and supplier of private label and contract-manufactured products for the domestic household and professional cleaning and hygiene markets. It sells over 1bn products a year, to 49 of the 50 top grocery stores in Europe.

So what’s the current state of play with the McBride share price? Well, a penny stock is one that trades for less than £1. McBride shares are currently trading for 34p. At this time last year, the shares were trading for 78p, which is a 56% drop over a 12-month period.

I believe McBride shares have fallen due to macroeconomic and geopolitical factors in recent months, but more on that later. These issues have affected performance.

For and against buying the shares

FOR: McBride is an established provider of cleaning products and solutions. This is in a time when the pandemic has created a new focus on hygiene. Currently, there are no signs of the pandemic ever fully disappearing. This means sales of cleaning and hygiene products should continue to increase, in my opinion.

AGAINST: Soaring inflation has led to a rise in costs of raw materials. The supply chain crisis has also affected many businesses. McBride is no different. All these factors have affected the balance sheet. There is no telling if this is a permanent change to the economy in terms of cost of materials and supply chain disruptions.

FOR: McBride has a consistent and long track record of performance. A penny stock with extensive trading information is not a common thing. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see that it has reported consistent revenue for the past four years, close to £700m. Coming up to date, a half-year report released at the end of February reported inflationary pressures but I prefer to focus on the steps management took to combat these issues. McBride is undergoing a new pricing strategy that will help boost the bottom line as well as a cost saving initiative. The results of these initiatives will become clearer in the full-year results.

AGAINST: The other issue I have is that McBride may need to increase prices to continue its profitability and growth. Despite the macroeconomic outlook, raising prices can affect relationships and McBride may lose customers due to this. This would have a real impact on the bottom line and any returns I would hope to make.

A penny stock I’d buy

I do believe McBride is a good stock for longer-term recovery despite current pressures. The shares look cheap, on a price-to-earnings ratio of close to 3. Industry peers are predominantly operating on a ratio of close to 10.

I would be willing to add a small number of McBride shares to my holdings. I’d hold on to them for the long term, which is my investing mantra. I would expect to see growth in the longer term.

Cleaning giant

McBride is a leading European manufacturer and supplier of private label and contract manufactured products for the domestic and professional cleaning and hygiene markets. It operates across five divisions. These are liquids, unit dosing, aerosols, powders, and Asia Pacific. It sells over 1bn products a year and supplies its products to 49 out of Europe’s top 50 grocery stores.

Penny stocks are those that trade for less than £1. As I write, McBride shares are trading for 57p. At this time last year, shares were trading for 80p, which is 28% higher than current levels. In the past six month, the shares have fallen over 30%.

I believe the McBride share price dip can be attributed to the ongoing supply chain crisis as well as rising inflation and costs.

Long-term recovery opportunity

Firstly, the pandemic has shone a new light on the need for cleaning products and exemplary hygiene. The virus and the spread of it has encouraged more people to consider their hygiene and cleanliness habits. McBride should benefit from this boosted awareness and demand for its products.

Next, the economic uncertainty that came with the pandemic, such as the market crash, has seen consumers flock towards cheaper alternatives of products. Cheaper does not always necessarily mean inferior quality, particularly in the cleaning sector. McBride’s products are often own label cheaper options compared to premium branded products. 

In addition to demand and McBride’s place in the market, I can see it has a favourable track record of performance. Many investors avoid penny stocks due to lack of history or comparable performance. I must note that past performance is not a guarantee of future performance. For the past four years, between 2018 and 2021, revenue stayed consistently close to the £700m mark. Furthermore, gross profit increased between 2018 and 2020.

Looking at McBride’s most recent update reported last week, it mentions price increases that most of its customers are taking onboard. McBride expects to report a loss for its half-year period, ending December 31 but it reinforces that it has a £80m cash rich balance sheet to help navigate current headwinds.

Penny stocks have risks

The rise in cost of raw materials, especially those needed for cleaning products, is a worry for McBride. As last week’s trading update mentioned, these costs are being passed onto customers. Sometimes this is not well received and can result in a loss of customers or customer confidence. In addition to this, the supply chain crisis could affect operations and performance too.

Overall I expect McBride to recover in the longer term. I believe current macroeconomic issues are short to medium-term issues. McBride’s business model and demand for its products should see its profit rise nicely over time and its share price increase and provide me with a healthy return. I invest for the long term so expect some potential bumps in the road at the moment. At current levels I would add McBride shares to my holdings.

That said, I like to scan the market for great penny stocks to buy. The reluctance of many to take the plunge with low-cost UK shares like these gives me the chance to root out an overlooked bargain or two.

As someone who invests for the long term, I’m not overly concerned by the possibility of temporary share price volatility. I buy shares that I think will rise in price during a period of years, not days, weeks, or months. I don’t rule out buying a quality share just because it trades below £1. It’s worth remembering that US tech giant Apple once traded inside penny stock territory before sky-rocketing to current levels.

2 cheap UK shares on my radar

With this in mind, here are two penny stocks looking quite unloved. I’d buy them following recent share price falls and aim to hold them for the long term.

Ready to clean up

The McBride (LSE: MCB) share price has tanked 20% in the past six months, meaning it’s just 18% more expensive than it was a year ago. The business makes a broad range of own-branded household products for retailers like supermarkets. And it’s been battered by a sharp rise in input costs of late that have prompted a series of profit warnings. The escalating supply chain crisis means further trouble could be coming down the track.

However, as a patient investor, there’s a lot I like about McBride. I think profits will rise solidly over the long term as rising consumer demand for value boosts sales of cheaper, own-branded products. Furthermore, I think volumes of the penny stock’s cleaning products will rise amid growing awareness over hygiene following the global pandemic. I fully expect its share price to bounce back strongly.

Another unloved penny stock to buy

Concerns over the British economic recovery have dragged Breedon Group (LSE: BREE) lower in recent months. It’s down 10% from its share price three months ago, reducing gains on a 12-month basis to 33%.

The construction materials supplier is highly cyclical. And so it’s no surprise that investors have been selling the penny stock as signs of an economic slowdown have increased. Breedon owns several quarries along with cement plants, ready-mix concrete plants and asphalt plants.

But as a long-term investor, I think Breedon’s profits outlook is compelling. Demand for its products should step up several notches as housebuilding rates in the UK improve. It will also benefit from rising investment to upgrade Britain’s creaking infrastructure.

Like McBride, I think this penny stock could deliver tremendous shareholder returns in the years ahead.

I want to have some exposure to penny stocks for their growth potential, but I also want to limit my risk. Owning a handful of different penny stocks can help me accomplish both aims. 

With that in mind, here are some of the best shares to buy now, which I’d acquire today. 

Penny stocks on offer 

The first company I’d buy is the leading European manufacturer and supplier of cleaning products, McBride (LSE: MCB). 

After a bumper 2020, rising material costs have brought this business sharply back to earth in 2021. In a recent trading update, management warned pre-tax profit in the company’s current financial year could decline by as much as 65%. 

This isn’t very reassuring. But I believe this is one of the best shares to buy now, considering its growth potential. If McBride can pass rising costs onto customers, this year’s setback should be easy to overcome. Management can then focus on returning the group to growth and its long-term expansion strategy. 

There’s a risk this won’t happen. In that situation, the company will have to absorb higher materials costs, and it may not recover from the setback. That’s something I’ll be keeping an eye on. 

Best shares to buy now

McBride’s recent problems show the challenges of investing in penny stocks. One way to get around this is to buy a trust that invests in other small businesses to increase diversification. 

One such trust that’s also a penny stock is the Schroder UK Public Private Trust (LSE: SUPP). Currently trading at a discount of around 20% net asset value, the trust owns a portfolio of public and private companies. It recently invested £10m into the challenger bank Revolut as part of a large fundraising by the institution. 

I’d buy this trust as it provides an excellent way to gain exposure to many small corporations. However, it’s pretty risky, as investing in small businesses is very challenging. There’s also no guarantee the trust will ever produce positive returns if these companies don’t increase value. 

Still, it does have some record of success. Earlier this year, the fund sold its stake in therapeutic antibody company Kymab to Sanofi for $82m. 

Renewable energy

The final company I’d buy is the engineering group Lamprell (LSE: LAM). 

This former oil & gas engineering group is repositioning itself as a renewable energy infrastructure provider. During the first six months of its financial year, its bid pipeline increased 15% to $6.9bn as new opportunities in the sector emerged. Renewables comprised 50% of the pipeline. 

As the group builds on its experience in the sector, I expect new business wins to increase. This could help Lamprell strengthen its balance sheet and grow profitability. 

Unfortunately, like all penny stocks, this firm does face significant challenges. The engineering sector is highly cyclical, and a sudden downturn in demand could have a devastating impact on growth. Due to its small size, the company may struggle to compete with larger peers. 

The first is cleaning products maker McBride (LSE: MCB), due to deliver a full-year report on 7 September. But even before we get to see it, it’s being eclipsed by an August trading update for the next year.

Due to uncertainties regarding raw materials, the company decided in July it wouldn’t offer any 2022 outlook guidance. McBride now says it expects first half EBIT to be around break-even, with profit “heavily weighted towards the second half.”

Pre-tax profit for 2021/22 should drop to around 55-65% below the current 2021 consensus, with debt at 30 June 2022 around 5-10% higher. The share price took a dive in response, though it’s pulled back a little bit since. Despite that, McBride shares are still up more than 30% over the past 12 months. So there’s still some investor confidence there.

Once supply difficulties are passed, I think McBride could have a better future ahead of it. But, for now at least, it’s a penny stock for me to watch and wait.

Pandemic profit boost

EKF Diagnostics (LSE: EKF) shares have had a cracking time during the pandemic. They’re up more than 150% over the past two years, though still at penny stock levels. Interim results are due on 14 September, and an update in July told us to expect “H1 2021 performance in-line with already upgraded management expectations.”

EKF told us its trading reflects “ongoing strong demand for our contract manufacturing services for Covid-19 sample collection devices and associated kits.”

The half is expect to deliver adjusted EBITDA around £12.75m, up from £8.93m a year previously. Cash, net of borrowings, stood at £20.39m at 30 June. Oh, and there’s a 1.1p per share dividend coming, in line with the company’s “modest but progressive dividend policy.”

The board’s hoping for “significant double-digit growth in adjusted EBITDA over the next 3 to 4 years,” even aside from Covid-related revenue. Will I buy? Not without seeing the full results and thinking hard about the stock’s valuation. But I’m definitely adding EKF to my candidates list.

Penny stock troubles

Double glazing firm Safestyle UK (LSE: SFE) is my final penny stock pick, with H1 results scheduled for 23 September. The Safestyle share price has been hovering in the 50-60p range for the past couple of months. But that’s after falling back from nearer 70p in May.

Overall, the stock hasn’t done too badly in the pandemic, up a bit above 10% in two years. But that hides longer-term difficulties, with the shares having lost nearly 80% of their value over the past five years. That’s not really surprising, seeing the earnings collapse of the recent past leading to three years of losses.

July’s trading update told us to expect H1 revenue of about £72.9m, up 13% from pre-pandemic 2019. That seems positive, and the £14.4m net cash at 4 July is another good sign. And the firm said it’s “now generating sustained positive net cash inflows.”

I’d still want to see firm evidence of a sustained turnaround before I’d buy though. It’s wait and see again for me.

Ready to lift off?

Global air travel is gradually recovering as the pandemic eases. Some areas are further ahead than others — according to jet engine maker Rolls-Royce, domestic flying and private jet activity are already back to 2019 levels. International flying is still well down.

My pick for aviation exposure is chartering specialist Air Partner (LSE: AIR). This business provides a wide range of charter services to governments, companies, and individuals. It also provides aviation training and security.

Air Partner’s share price is still slightly below 2019 levels, but the outlook’s improving. And despite its small size, this business has a much longer and more consistent record of profitability than many airlines.

The main risk I can see is that growth hasn’t been consistent — I wonder if the business will struggle to get much bigger. Even so, this penny stock looks reasonably valued to me, on 13 times forecast earnings. With a useful 3% dividend yield, I’ve been buying the shares for my portfolio.

Profit from gold

My second pick is a company I’ve owned before and probably shouldn’t have sold. Capital (LSE: CAPD) is a mining services company. Formerly known as Capital Drilling, the group provides drilling and other services for some of the biggest gold miners in Africa.

The growth story here’s quite exciting, in my view. Historically, the company just provided drilling rigs for hire. But under chairman Jamie Boyton, who has a 12% shareholding, Capital is expanding to offer other services, such as earth moving. Effectively, the group appears to be moving towards becoming a contract mining company that can operate gold mines on behalf of their owners.

What could go wrong? Capital is having to invest significant amounts in new equipment to win bigger contracts. If the contracts don’t deliver the level of profitability that’s expected, then the group could find itself losing cash fast.

So far, progress seems good. Capital shares are broadly flat on a year ago, but profits are rising steadily. The shares look reasonably valued to me, on less than 10 times earnings. I’m tempted to buy back in.

A penny stock I’m avoiding

One business I’m avoiding today is consumer goods producer McBride (LSE: MCB). This company makes cleaning products, mostly own-branded items for customers such as supermarkets.

Last year saw strong demand, due to Covid-19, but even so the company’s profit margins came under pressure and underlying profits were flat. Things have since taken a turn for the worse. McBride has issued two profit warnings since May. The company says raw material and transport costs are rising, while passing price increases onto its customers is taking time.

These problems highlight a long-term risk with this business — big customers will always put pressure on pricing. McBride’s operating profit margin has always been low, peaking at 4.8% in 2016. Margins have fallen since then.

Despite those two profit warnings, McBride shares are actually up by 33% over the last year. But I don’t expect further gains until the outlook improves. For me, this is a stock that’s not worth the risk right now.

There are technically two ‘penny’ stocks in the FTSE 100!  

As it happens, both would make my list for the best penny stocks to buy now. Despite a very large debt risk, I think Rolls-Royce remains undervalued. A recent sell-off of foreign liabilities is promising for cost-cutting, too. Lloyds remains a buy for me despite this year’s 30% price rise, because dividends are returning, at an expected 4.4% yield. 

But when I’m looking for penny stocks to buy now I usually only consider small companies – those with a market cap of less than £250m. And I think these two have better prospects than multinational giants. 

Return of the Mac

Shares in McBride (LSE:MCB) have gained a modest 3.5% since I last tipped them in March. That’s not a great return for tying up capital for four months. Buying any penny stock comes with opportunity risk. By buying one, I have to turn down everything else. But I still see long-term upside in Europe’s leading own-brand cleaning goods supplier.  That’s why it makes my best penny stocks to buy now list.

There are concerns: McBride shares crashed more than 25% in a day when it released a surprise profit warning in May. While the share price recovered fairly quickly, profits are expected to be 15% lower this year than in 2020.  

I’m also uneasy about the “uneven levels of demand” mentioned in that trading update. And the fact that the “raw material environment remains challenging” because supplies are less readily available. A price-to-earnings ratio of just 6.2 perhaps reflects this uncertainty.

CEO Chris Smith has, however, moved to raise some prices and slash costs to improve margins. And £715m in sales on a £153m market cap still looks decent value to me in the longer run. 

A generous serving

Long-term recurring revenues are usually a metric that helps a company make my penny stocks to buy now list. I see a lot of potential in £132m market cap construction and energy services group Sureserve (LSE: SUR). 

On 8 July 8 it announced an eight-year, £36m gas servicing and electrical testing contract. That’s with a new client, too. So I can be reasonably confident the business is growing nicely in the medium term. 

Half-year interim results to 31 March 2021 showed some interesting statistics. Operating profits were up 54% to £4.8m and earnings per share jumped 71%. Interim chairman Robert Leggett noted how the business shifted from a net debt position of £3.5m to net cash of £9.7m.

“The immediate future remains uncertain due to the pandemic,” Leggett said. And this is a concern for all my penny stocks to buy now. The shares could tank if Covid-19 gets worse and restrictions are reimposed. 

Its clients remain largely in the public sector and government funding cuts could mean this source of revenue dries up. According to the National Audit Office, 25 councils in the UK are on the brink of bankruptcy. Half say their finances won’t recover until 2025. So this is an obvious concern. 

Still, Leggett said Sureserve’s “substantial order book [provides] good visibility on earnings”. That stronger net cash balance sheet could help it ride out problems in the medium term.

The McBride share price crashes on a profit warning

Manchester-based McBride is Europe’s leading supplier of retailer own-brand goods for household and professional cleaning/hygiene markets. It was founded in 1927 and has been continuously listed in London since 1995. It operates in 10 countries, employs 3,400 people, and had sales of over £700m in 2020. But the group has started struggling in 2021, hence the McBride share price taking a tumble today.

At its 2021 high, the McBride share price peaked at 97.8p on 15 April, so it’s fallen back almost 20p since then. But what triggered today’s price crash? Alas, McBride released a surprise profit warning, sending its shares sharply southwards.

Today, McBride warned of “increasing input costs…for many of our raw materials” in the first quarter of 2021, with “rapid, significant and sustained price escalation” in recent weeks. McBride cautioned that it “will see further double-digit increases on average across these materials and packaging items by June 2021”. That’s more than double the input inflation it expected in mid-March, with the biggest increases falling on its liquids division. Obviously, higher input costs will eat into margins, hence the blow to the McBride share price.

McBride expects yearly profits to fall 15%

McBride went on to say that “revenue volatility continues to be a challenge in most of our markets”, with sales of household cleaners normalising from 2020’s peaks. Furthermore, it admitted that “sales of laundry and personal care products have remained very subdued”. With sales weakening, the group now expects second-half revenues to be 6% lower year-on-year. Again, that’s not exactly good news for the McBride share price.

For me, the biggest blow to the McBride share price came from the downward revision to 2020/21’s profits. In the year ending June 2021, the company expects profits to be more than a seventh (15%) lower than in the 2019/20 financial year. Then again, McBride is taking corrective and remedial action to tackle these threats to margins and profits. It has raised prices selectively, as well as accelerating cost-cutting programmes. These improvements and mitigatory actions should produce results in the second half of this calendar year.

Would I buy McBride at the current price?

At the heart of McBride lurks a decent business trying to do well. After all, own brands are very much in vogue these days. Just look at the stonking success of German discount chains Aldi and Lidl. But the group has suspended its guidance for the 2021/22 financial year due to “extreme volatility in material pricing”. That makes me nervous, so I’d hold off buying the McBride share price at 78.2p. To err on on side of caution, I’d sit tight and await the £164m company’s preliminary results announcement and outlook update in September. I’d prefer to see if the group can halt this sales slide and margin erosion before buying MCB stock!

One for the clean freaks!

I’d be very happy to buy UK fast-moving consumer goods (FMCG) share McBride (LSE: MCB) in my ISA. This penny stock manufactures a broad range of cleaning products, allowing it to ride a growing need for high standards of cleanliness among consumers. Latest results from the recently-rebranded Reckitt reveal how rapidly this market is growing.

Like-for-like sales of its hygiene products rocketed 28.5% year-on-year between January and March, it said. This was led by “very strong, volume-led growth” across its Lysol, Finish and Air Wick ranges.

As Hargreaves Lansdown analyst Laura Hoy notes: “While vaccine rollouts are making a return to normalcy look possible, some pandemic-related trends look here to stay and the public’s new obsession with hygiene is one of them.”

And so the likes of McBride can expect strong and sustained demand for its goods going forward. This explains why City analysts think this UK share’s annual earnings will rise 16% and 8% in the financial years to June 2021 and 2022 respectively.

Bur be aware that McBride operates in a hugely-competitive arena. And it doesn’t have the colossal brand power of industry heavyweights like Reckitt, Unilever and PZ Cussons to build a large and loyal customer base either.

However, I believe his penny stock’s low valuation merits serious attention today. At 93p per share, McBride’s shares command a forward price-to-earnings growth (PEG) ratio of 0.6. A reading below 1 tends to suggest a UK share is being undervalued by the market.

Another cheap penny stock

Cairn Homes (LSE: CRN) is another cheap penny stock on my radar today. City brokers think earnings at the Irish housebuilder will soar 19% year-on-year in 2021. This leaves the company — which changes hands at 93p per share — trading on a forward PEG multiple of 0.7.

As in the UK, there is a colossal shortage of affordable homes in Ireland. This presents enormous profit-making opportunities for Cairn Homes in the years ahead. The business plans to build 2,500 new homes over the next two years alone to help the Emerald Isle meet this shortfall.

The latest house price report from Daft.ie illustrates the impact of this shortage on property values. It shows the average home price soared 7.6% year-on-year in March, thanks to what the organisation puts down to “strong demand and very weak supply.” Daft.ie says there were less than 12,000 properties available to buy as of 1 March, down 40% from the same point in 2020.

I own FTSE 100 housebuilders Barratt and Taylor Wimpey in my ISA to play the favourable housing market in the UK. And I’m thinking of adding penny stock Cairn Homes to play the positive trading conditions in Ireland too.

But I have to bear in mind that Ireland has been hit hard by the Covid crisis and any economic downturn could hit house-buyer demand. 

On the way to building an $84.6bn fortune, Warren Buffett famously said that “risk comes from not knowing what you’re doing”. I don’t know anything about graphene or fashion, for example. So I don’t invest in companies in those businesses.

But I do understand these sectors.

Micro-cap stocks to buy

My first micro-cap stock to buy is Alumasc (LSE:ALU), an AIM-listed sustainable building products supplier. It’s a specialist in roofing, screening, and plastic-injection moulded products, which sounds incredibly boring. But these are the kinds of businesses that can make a lot of money for their shareholders.

It has a some debt on its balance sheet, so there is some risk there, but it does have nearly £20m in cash, which means it can take advantage of upcoming opportunities. With a forward P/E ratio of 7.8 and a PEG ratio of 0.4, my value investing Spidey senses are tingling! And dividends are returning in force after bosses sensibly cut them to save cash last year.

In half-year results to 31 December 2020, revenue climbed 11% to £45.6m, pretax profits doubled to £5.5m from £2.1m, and earnings per share jumped more than 100% from 5p to 12.2p. That shows me there is growing demand for Alumasc’s low-carbon building products. In the last 12 months Alumasc has brought in £80.4m in revenue. That’s 30% higher than its total market cap. Talk about an undervalued micro-cap stock to buy. 

Alumasc does have a number of rivals like Polypipe Group (LSE: PLP) or the much larger FTSE 250 firm Ibstock (LSE:IBST) and competition is fierce at this end of the market. The overall risk here is that Alumasc can’t differentiate itself over time and fails to win new contracts.

Cleaning up

The next stock to buy on my micro-cap wish list is McBride (LSE:MCB). This is Europe’s largest maker of own brand household goods. But at a market cap of just under £150m it’s not particularly well known to investors. Again, like Alumasc, it’s the profitability, stonking value, and growth that’s got me excited here.

There has been “strong profit performance driven by increased demand for cleaning, dishwash and aerosol products,” McBride said in its 2021 half-year report. Pre-tax profits rose 74% to £16.9m. In a post-Covid-19 world I see increased demand for these products in future, too.

There will also be a new policy of annual dividends, McBride boss Chris Smith announced in February 2021. These shareholder payouts should be easily affordable, with McBride’s dividend cover of 5.3. Dividend cover of less than 1 means a business is paying out more in dividends than it makes in profits.

McBride’s net debt of £117.6m is an issue, however. I usually buy business that are debt-free. Smith has set strict debt limits for his team to follow, but if these fail there could be a long-term hit to profits. 

The UK’s economic fortunes could rebound faster than predicted, the Bank of England said this week. So the micro-cap stocks to buy, for me, will be the ones able to cash in on soaring household and business spending.