As such, here are three top penny stocks I would buy now, considering their growth potential and current valuations. 

Top penny stocks

One of my favourite sectors to hunt for bargains at the moment is real estate. Commercial property prices were hit hard by the pandemic, but they have been recovering steadily. In many cases, the share prices of companies with exposure to the sector have been slow to catch up. I think this presents an opportunity.

Real Estate Investors (LSE: RLE) owns a commercial property portfolio in the north of England. The stock is currently trading at a price-to-book (P/B) value of just 0.7, and it also supports a dividend yield of 8.6%. 

Even though these metrics look attractive, I need to consider the risks the company is facing. These include higher interest rates and potential economic contraction due to the cost of living crisis. 

Despite these headwinds, I think the company looks incredibly attractive and undervalued, considering the recovery in the commercial property market. 

Growth opportunity

The short-term lending market has faced a lot of criticism in recent years, and for good reason. Unscrupulous lenders have been ripping off borrowers. And as regulators have clamped down, many have collapsed. 

Morses Club (LSE: MCL) is one of the few survivors. I think the corporation now has an opportunity to capture market share where other businesses have been forced out of the market. That said, the prospect of additional regulations is probably the most considerable risk facing the group today. 

Nevertheless, I think its low valuation more than makes up for this risk. The stock is trading at a forward 2023 price-to-earnings (P/E) multiple of 5. This makes the firm one of the cheapest penny stocks on the market.

Analysts also believe the company has the potential to yield 12% next year as it returns to growth. Considering these metrics, I believe the opportunity here far outweighs the risks of investing. 

One of the best income stocks to buy now

Duke Royalty (LSE: DUKE) has an interesting business model. The company provides financing to its clients and receives interest in the form of royalties. It reinvests some of this money and returns a percentage to investors. 

Unfortunately, the firm has had to lean heavily on shareholders to drive growth in recent years. It has dramatically increased the number of shares outstanding as it uses investors’ cash to expand the business. Further equity issuance could hit returns in the future. 

Still, I think Duke Royalty has potential as an income and growth investment. That is why I would add the company to my portfolio of penny stocks. At the time of writing, the stock supports a dividend yield of 5.8%, which could hit 7.2% next year, according to City analysts. 

I’ve been hunting for potential bargains and have found five stocks I’m interested in adding to my portfolio in 2022.

I reckon all of these unloved shares look good value and could deliver big gains over time. But there are no guarantees. Sometimes there’s a good reason why a share is cheap. Problems may be lurking in the background. The business may be losing key customers.

The share prices of smaller companies also tend to be more volatile than larger stocks. Losses (and gains) can be very sudden. For these reasons, I wouldn’t ever invest in penny shares with money I couldn’t afford to lose.

I reckon this share could double

My first pick is a business I’ve been following for some years. I reckon now could be the time to buy. Gulf Marine Services (LSE: GMS) owns a fleet of offshore drilling rigs hired out to customers in the Middle East and elsewhere.

Gulf Marine’s fleet is very modern, but this led to a problem. The company had funded its fleet expansion with debt. By 2016, net debt had topped $400m, but the oil market crash in 2015 had caused demand for hire rigs to slump.

However, the business is under new management, reporting regular contract wins and improved fleet utilisation. Importantly, debt has started to fall.

Gulf Marine shares currently trade on just 3.5 times 2022 forecast earnings. This reflects the company’s high debt load. But if debt continues to fall, then I think the shares should re-rate to a more normal valuation.

This is still a risky situation. Debt is still very high and the current boost from high oil prices may not last. But if trading remains good, I think Gulf Marine’s share price could rise strongly from current levels.

Can this quality business keep growing?

My next pick is quite different. Currency specialist Record (LSE: REC) provides services to clients who need to manage their foreign exchange exposure. It’s a highly profitable business, with an operating margin of about 30%.

The problem is that growth has been pretty weak in recent years. Between 2017 and 2020, profits were broadly flat.

Newish chief executive Leslie Hill has brought in some fresh ideas and seems to have restarted the group’s growth. Revenue rose by 38% to £16.3m during the six months to 30 September, while pre-tax profit doubled to £5.2m.

I don’t expect this rate of improvement to be maintained, but broker forecasts suggest Record’s earnings could rise by 20% in 2022. In the meantime, the group’s balance sheet looks rock-solid to me, and the stock boasts a generous 6% forecast dividend yield.

Record looks good value to me at current levels. I’d consider buying this penny stock for income and growth.

Still going strong after 157 years

Investing in old companies isn’t a guarantee of success. But, in my experience, businesses that have been trading for more than 100 years often have some attractive qualities. Renold (LSE: RNO) is one such firm. This business specialises in industrial chains and gearboxes — technology it’s been developing and perfecting since 1864.

Growth hasn’t always been in a straight line. Major customers in the mining and construction suffer cyclical slumps from time to time. Demand for some products has changed over the years. I suspect the shift to electric power and renewable energy will create fresh challenges.

Renold’s revenue and profits have fallen over the last two years, in part because of the pandemic. However, half-year figures for the six months to 30 September suggest the business has returned to growth. Revenue for the period rose by 17% and adjusted operating profit was 41% higher.

Broker forecasts suggest this growth should continue into 2022/23. With Renold shares trading on just eight times forecast earnings, I’d be happy to buy the shares for my portfolio.

A special situation with a 6% yield

Newspaper and magazine distributor Smiths News (LSE: SNWS) is in a special situation. The company’s valuation reflects this — the shares currently trade on just four times 2022 forecast earnings and offer a 6.3% dividend yield.

If this was a healthy, growing business, I’d probably expect a P/E of 8-10 and a yield of 3-4%. The problem is that printed newspaper and magazine sales are in long-term decline. These days, this stuff gets published online.

However, Smiths News has a 55% share of the remaining market. This makes it big enough to be profitable and cash generative.

The company says it already has plans to cut costs to match falling volumes. Brokers who cover the stock have bought into the story. They expect earnings to rise by 3% next year, pricing the stock on 3.9 times forecast earnings. Another chunky dividend is expected, indicating a potential yield of 6.3%.

The main risk I can see is that the business will keep shrinking unless management finds new markets for Smiths’ distribution services. At some point, which is hard to predict, this shrinkage could start to threaten the company’s viability.

My view is that there’s probably an opportunity here. For this reason, I’d be happy to open a small position in Smiths News today.

A penny stock turnaround?

Doorstep lender Morses Club (LSE: MCL) is expanding steadily into online lending and banking. The company focuses on customers with bad credit ratings, providing loans and pre-paid debit cards.

The pandemic caused revenue and profits to fall sharply, but Morses now appears to be on the road to recovery. The group’s loan book rose by 8.5% to £60.3m during the six months to 28 August, while pre-tax profit for the period rose from £2.3m to £2.6m.

This business will face ongoing regulatory risks, in my opinion, as I expect the rules on bad credit lending will continue to tighten. The impact of this could be that Morses’ profitability will be lower in the future.

Even so, Morses Club has a successful track record in this sector and a significant share of the market. Profits are expected to rebound in 2022/23, leaving the shares on just six times forecast profits. At this level, I see this penny stock as a potential buy.

Gold star

The fate of commodities stocks is naturally tied closely to the prices of the raw materials they produce. In the case of penny stock Condor Gold (LSE: CNR) I think there’s plenty to get excited about. It’s not just the prospect of a long and bumpy battle against Covid-19 that could keep gold prices strong. Low central bank rates are likely to remain in place to keep the recovery going, in turn driving fears over runaway inflation.

There’s also the prospect of a sharp decline in the US dollar over the short-to-medium term. This boosts commodity prices as it effectively becomes cheaper to buy dollar-denominated assets.

I’d buy this UK mining share despite the possibility that efforts to get its La India project in Nicaragua to production in the near future could hit trouble. Condor Gold is seeking to produce 100,000 ounces of the yellow metal a year when output eventually commences, with material production increases targeted thereafter.

Bang on the money?

Small loans provider Morses Club (LSE: MCL) might not be everybody’s cup of tea. In fact, with ethical investing becoming more and more popular, the doorstep lender could see demand for its shares steadily sink over the long-term. There’s also the fact that the hostile regulatory environment that has pushed many of its competitors into extinction could eventually bite this penny stock too.

For the time being though, trade is flourishing and from an investment perspective this makes Morses Club worthy of serious attention. Not only is the business benefiting from the demise of its rivals, its huge investment in its digital operations is also paying off handsomely.

The number of customers on its Digital division’s books leapt 80% year-on-year in the five months to July. Moreover, the UK share is also taking steps to ready its traditional home collections business for the digital age. Consequently, 65% of lending in the five-month period was cashless.

A top retail penny stock

The value retail sector is tipped to continue growing strongly over the next decade. And so I think Card Factory (LSE: CARD) — a seller of greetings cards, balloons, wrapping paper and other paraphernalia wheeled out on special occasions — should thrive.

The business sells its products at a vast discount to other cards retailers like WH Smith and Clinton Cards. And this could help it thrive too if the UK economy experiences a tough economic ride following Covid-19 and Brexit.

I also think steps to improve its e-commerce proposition should lift earnings considerably. Indeed, I’m encouraged by the 135%-plus jump in online revenues during the 12 months to January. Remember though, the penny stock faces extreme competition from online bespoke cardmakers Moonpig and Thortful.

However, there are some penny stocks out there that appear to have these qualities. I’d buy these equities for my portfolio today. 

Penny stocks for income 

The first company on my list is the photo booth and laundry operator Photo-me International (LSE: PHTM). This penny stock has always been an income champion. Its operations throw off enough cash to allow management to reinvest in the business and return capital to shareholders.

While the firm suspended its dividend in 2019, the group has historically paid out around 70% of earnings per share. Recent trading has been better than expected. This leads me to think the company may reintroduce its dividend soon.

With earnings per share expected to hit 7.6p in 2022, up from 4.9p for 2020, this implies the stock could offer a dividend of 5.3p per share next year. I should note there’s no guarantee this will happen. It’s only speculation at this point. Possible risks include another coronavirus outbreak and higher than expected costs. 

Still, even considering these risks, I’d buy the income champion for my portfolio of penny stocks today. 

Gap in the market 

Another company I’d buy is the consumer finance business Morses Club (LSE: MCL). I recognise this stock may not be suitable for all investors, due to the ethical considerations of the home-collected credit market. 

However, I see an opportunity here. Many of the company’s peers have been forced out of business during the past few years as regulators have clamped down on the sector. Morses has survived. Therefore, it may be able to take advantage of the gap left in the market, although this isn’t guaranteed. 

Recent growth trends are positive. Customer numbers in the digital division for short-term and long-term lending products have increased by 40% in the most recent quarter, compared to the beginning of 2021. 

As such, considering its growth potential and 3.8% dividend yield, I’d buy the firm for my basket of penny stocks today. 

Trading for growth

The final company I’d buy for my portfolio of penny stocks is the currency management specialist Record (LSE: REC). 

This firm is projected to report an 80%+ increase in net profit this year after winning several new contracts. Management is expected to increase the company’s dividend to reflect this with a 50% increase in the payout pencilled in by analysts. This would leave the stock yielding 4.3%. 

While there’s always a risk the company may lose the contracts it’s signed to manage currency, I’m confident the enterprise can build on this growth in the years ahead. Another risk the business may face is higher costs due to increased regulation. 

Despite these challenges, it looks to me as if Record is currently firing on all cylinders. That’s why I’d buy the company for my portfolio today. 

Top penny stocks 

The first company on my list is the home collected credit lender Morses Club (LSE: MCL). The business provides small loans of between £200 to £1,500 with interest rates of up to 498.34%. 

Due to the ethical considerations of short-term, high-interest loans, some investors might not be interested in this enterprise. I fully understand this point of view. The sector has also faced significant regulatory headwinds in recent years, which have forced some of Morses Club’s peers out of business. 

These risks aside, I’d buy the company for my portfolio of penny stocks considering its growth potential. According to its latest trading update, customer numbers at its digital division for both short- and long-term lending products increased to 40% in the three months ended 31 May. The total loan book balance increased 99%. 

Based on these numbers, it seems to me Morses Club is on track to report a solid financial performance in its current financial year. This is why I’d buy the company for my portfolio of penny stocks despite the regulatory and ethical issues outlined above. It seems there remains a demand for these products, which the business is more than happy to meet.

Consumers also appear to rate Morses Club quite highly, with an average rating of 4.5 stars on Trustpilot.

Recovery play

The other company I’d buy for my portfolio of penny stocks is the waste-to-product group Renewi (LSE: RWI). This is a recovery investment, having reported losses in five out of the past six years.

It produced a small net profit of €11m for its 2021 financial year, although between 2016 and 2020, losses exceeded €300m. Unsurprisingly, group net debt has doubled during this period. There’s a risk that Renewi will never exit this cycle of losses and rising debt. 

However, analysts reckon it will continue to earn a profit for the next two years. Current forecasts suggest net earnings will hit €58m by fiscal 2023. 

These are just forecasts at this stage, and there’s no guarantee the company will hit the targets. Nevertheless, I’d add the shares to my portfolio of penny stocks, considering the firm’s recovery potential. 

If Renewi can hit City growth targets, the stock looks cheap. It’s currently trading at a 2023 forecast P/E of just 9. 

And even if the company struggles in the next few years, I am optimistic about its potential. The world is trying to move away from the throwaway culture, which means waste-to-product facilities could become more sought-after. This could work in Renewi’s favour. However, if the group fails to make the most of its facilities, a competitor with deeper pockets may step in and take over the enterprise. 

The Scancell Holdings (LSE: SCLP) share price has risen strongly after it announced plans to run clinical trials for its COVIDITY vaccine programme. The UK medical share was recently 6% higher from Monday’s close, taking gains over the past 12 months to 303%.

Scancell said it intends to run Phase 1 trials for its novel Covid-19 vaccine during the second half. This follows the release of preclinical data on two of its lead bivalent vaccine candidates: SN15 (also known as SCOV1), and SN17 (known as SCOV2).

The COVIDITY programme is based on the UK healthcare share’s ImmunoBody DNA vaccine platform. It’s hoped its vaccine candidates will offer improved protection against new coronavirus variants of concern. This is “due to the inclusion of the highly conserved nucleocapsid N antigen in addition to the more variable spike (S) protein,” Scancell said.

Trials ready to begin

A regulatory application to begin Phase 1 trials on unvaccinated individuals has been submitted to the South African Health Products Regulatory Authority (SAHPRA). A study isn’t possible in the UK because of the rapid rollout of Covid-19 vaccines here.

Scancell plans to gain approval from the Medicines & Healthcare products Regulatory Agency (MHRA) in the UK should Part 1 of the South African study demonstrate safety. Phase 1 trials here will see the SCOV2 vaccine given to recipients of two doses of an approved vaccine. The South African trials will be used to assess both SCOV1 and SCOV2.

Scancell chief executive Dr Cliff Holloway said: “There is a significant threat from future mutations of the SARS-CoV-2 virus, as we have seen with the rapid transmission of the Delta variant. Our next generation Covid-19 vaccine has the potential to work alongside currently approved vaccines by protecting the population against new variants of SARS-CoV-2.”

Another soaring UK share

The Morses Club (LSE: MCL) share price has also ballooned on Tuesday following the release of fresh trading numbers. It’s currently 8% higher on the day, and up 72% over the past 12 months.

Morses Club said it’s enjoyed “a steady increase in customer demand across all lending products in both its Home Collected Credit and digital divisions.”

Customer numbers at its digital arm ballooned 40% between March and May. And total loan book balances increased 99% versus the end of February. Meanwhile, new credit issued came in 33% above expectations, and collections performance was ahead of budget.

Elsewhere, customer numbers at its Home Collected Credit unit clocked in at 144,000 as of May. This was 7,000 fewer than the UK financial share reported three months earlier. However, collections at the division are more than double the number Morses Club had expected. And total new credit issued was also 16% ahead of company expectations.

UK GDP figures for August also came in today, showing a contraction of 0.1% for the month, worse than the expected 0% change. An upwards revision to this year’s June and July results suggests that the UK economy is still moving forward overall. The biggest drag on national GDP in the three months to August was the production and manufacturing sector (down 0.4%), while services outperformed (up 0.4%). 

Taken together, the data for the last three months is being interpreted as a sign that the UK economy will avoid a recession, albeit very narrowly. Unsurprisingly, the big drag on the economy has been the risk of a no-deal Brexit that seems to rear its head every few months, with little indication that the pattern will stop any time soon.

Dunelm Group

The big loser today was homeware retailer Dunelm Group (LSE: DLMN), whose shares are down more than 14% on the day. Despite reporting sales growth of 7.5% in the quarter ended 30 September, the FTSE 250 firm’s stock price is slumping due to “mixed trading” so far this quarter. CEO Nick Wilson commented:

Despite the recent softness in the homewares market and the increased political uncertainty, we are confident we can continue to win market share and our expectations for the full year remain unchanged. 

Growth in the group’s online segment accounted for the majority of overall growth – it shot up 34.7% year on year to £35.7m. However, online sales still represent a very small proportion of overall sales, with brick-and-mortar accounting for the majority of revenue – it brought in £219.9m, a like-for-like increase of 2.9% compared with the previous year. 

Morses Club

Another big faller today was home credit company Morses Club (LSE: MCL). The company released interim results for the half-year ended 31 August, reporting an 8.6% fall in tax-adjusted profits, causing the stock to fall more than 7% on the day. 

This is just the latest setback for shareholders of Morses Club, who have had to watch the stock price fall by almost a third in 2019. They may console themselves with the knowledge that this slump is not wholly tied to the company’s performance – at least some of it has to be attributed to Neil Woodford’s decision to liquidate some of his £13m position in the stock, in order to avoid a liquidity crisis at his Equity Income Fund.

As was argued by Paul Summers elsewhere on the Motley Fool, other investors may have simply been following the trend. Nonetheless, this sell-0ff certainly is linked to a fundamental event at the company, which may lead other investors to re-examine their opinions on it. 

I think it’s safe to say the UK-focused, home-collected credit lender is out of favour with investors. Indeed, with the share price close to 107p, the forward-looking earnings multiple for the trading year to February 2021 sits just below seven, and the anticipated dividend yield is a little under 9%.

A double whammy for the shares

A couple of things strike me as potentially driving the price falls in this stock. One is that it’s known the Woodford funds have been offloading the shares recently as part of their drive for investments in bigger firms with greater liquidity. Another is that Morses Club’s business is in a state of flux, albeit remaining profitable now.

The firm has a three-year business plan aimed at continuing its drive to generate growth organically and via acquisitions. And the strategy also involves diversifying operations to embrace online methods of acquiring trade. Meanwhile, the core home-collected credit (HCC) business is performing well.

We could read the figures from two recent acquisitions in a negative light. CURO Transatlantic and U Holdings both target the digital market and both “had financial challenges” when Morses Club purchased them. And they’ve contributed losses rather than profits over the reporting period.

Morses Club bought CURO Transatlantic while it was in administration and U Holdings needed “significant” investment. The directors said in today’s report that the turnaround and integration of the two businesses is “complex” even though “significant” progress has been made.

But I reckon buying stressed firms at low valuations is a decent growth strategy. The alternative of buying perky businesses at high valuations strikes me as risky, and it’s often a good idea for companies to look for expansion opportunities when markets or economies turn down. In this case, Morses Club sees the two acquisitions as helping to create a “foundation for further expansion into the digital arena for the business.”

Integration dragging on the results

In the first six months of the trading year to 31 August, the net loan book rose just over 6% compared to the equivalent period the year before, and adjusted profit before tax in the HCC division went up by just over 20%, which reveals the strength of the core business.

However, adjusted overall profit before tax slipped back just under 9% because of the offsetting effect of the costs and losses involving the integration of the new digital businesses.

The directors made a balanced assessment of the situation by keeping the interim dividend flat. But I think if we are leading into a weaker macro-economic environment, demand for the firm’s alternative credit offering could increase.

I reckon there’s every chance the company will be successful with its plans to integrate the new digital businesses. The current low valuation and high dividend yield look attractive to me, and I’d be inclined to buy some of the company’s shares before Brexit.

Harshly treated

Go back roughly 18 months and fashion/lifestyle retailer Ted Baker (LSE: TED) saw its share price riding high. Since then, a perfect storm of consumer jitters, bad weather, product issues and allegations of ‘forced hugging’ made against (and vehemently denied by) founder and former CEO Ray Kelvin have sent the value of the company crashing. At the close last Friday, the very same shares that were trading around 3,000p back in March 2018 could be yours for just 952p.

I still think the market has been a little too harsh on the company. Ted Baker remains a great brand with solid growth potential overseas and a history of generating high returns on the capital it invests. The recent product licence agreement reached with FTSE 100 clothing stalwart Next is another positive that many seem to have quickly forgotten about. 

That’s not to say I’d throw caution to the wind just yet. Ted reports to the market this Thursday. If there’s more bad news on trading (we’ve already had two profit warnings since February) the share price will likely continue its journey southwards for a while yet. Of course, any glimmer of recovery and the stock could soar.

Should the former be the case, I think this would only increase the likelihood of the company being taken back into private hands, possibly involving Kelvin himself. In the meantime, Ted starts the week valued at just 10 times earnings and yielding 5%. 

Woodford-inspired sell-off

Another small-cap that could turn out to be a great contrarian buy is doorstep lender Morses Club (LSE: MCL). Like Ted Baker, the market minnow’s shares have been on a downward trajectory for a while now, falling by a third in value since March. 

Why the big fall? At least some of this can surely be attributed to Neil Woodford’s decision to offload a proportion of his £13m holding in the company in an effort to raise cash to cope with the huge number of redemptions his flagship Equity Income fund will surely receive when it returns from suspension.

Such is the way the market works, a number of other investors are likely to have followed his lead in order to preserve their capital and not because there’s anything wrong with Morses per se. Indeed, this month’s update stated the company is trading in line with expectations and “continues to make strong progress” on the strategy of diversifying its product portfolio.

On a positive note, this surely gives prospective investors an ideal entry point. The business is now valued at nine times forecast FY20 earnings and has a price-to-earnings-growth (PEG) ratio of 0.5 — far below the 1.0 threshold legendary growth investor Jim Slater said investors should be looking for. The balance sheet looks solid and the stock comes with a massive 6.8% yield.

With concerns the UK economy may slip into recession in the near future, and the consequences this could have for our finances, Morses Club could suddenly find itself in something of a purple patch. 

One well-known share research website classifies some shares as super stocks. To qualify, a share must score well against value, quality and momentum indicators. I think picking shares like that can be a decent strategy. Here are three of my favourites right now.

Infrastructure investment

3i Infrastructure (LSE: 3IN) is a closed-ended investment company that invests in infrastructure businesses and assets in the UK and Europe. The company aims to deliver shareholders a sustainable total return of 8-10% per annum, with some of that coming from its progressive dividend policy.

A glance at the share price chart reveals the stock has been moving steadily up for some time, which I find encouraging. At the recent 287p, the share price is just over 30% higher than it was a year ago. But even now, the valuation isn’t excessive with the forward-looking price-to-earnings multiple for the trading year to March 2020 running just below 13. There’s also a dividend yield sitting a little over 3%.

The company manages its assets in sectors such as transportation, power, utilities, energy and healthcare, buying and selling businesses and investments at optimum times. I think such nipping and tucking looks set to keep the total returns rolling in for shareholders in the coming years.

Credit lending

Morses Club (LSE: MCL) is a UK-focused, home-collected credit lender operating via a network of self-employed agents who collect repayments on the doorstep on a weekly follow-up basis. The firm provides non-standard credit, which is usually unsecured, for borrowers who have difficulty obtaining credit from mainstream lending institutions.

At 175p, the stock has risen a little over 10% since the beginning of the year, which is a handy return when combined with the forward-looking dividend yield of almost 5% for the trading year to February 2020. City analysts following the firm expect double-digit percentage advances in earnings and in the dividend for the current trading year. And the directors expressed a confident outlook with an update at the end of February.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below 12 for the current trading year. I think the shares are attractive.

Education services and products

RM (LSE: RM) supplies products and services for the education market in the UK and abroad. At the end of March, the company released a steady-as-she-goes trading update and City analysts following the firm expect single-digit increases in earnings and the dividend going forward.

At 231p, the stock is around 14% higher than it was at the start of the year. The forward-looking dividend yield is also running just below 4% for the trading year to November 2020. But the dividend is a real success story. Over five years, the payment has increased by just over 100% and I think the firm is capable of delivering a similar return from the dividend in the years to come.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below nine for the trading year to November 2020. That looks attractive to me, given the sector has defensive qualities.