Generally defined as businesses with a share price of less than £1, these firms also have fairly small market capitalisations. After trawling through the indices, I’ve found two companies that I think could add value to my portfolio and may take off. Let’s take a closer look.

Restaurant Group

Restaurant Group (LSE:RTN) owns and operates restaurants around the UK. Some of these are well-known names, like Wagamama and Frankie & Benny’s. 

Unsurprisingly, the company was hit hard during the pandemic as dining outlets were forced to close. The share price plummeted from around 130p in February 2020 to a low of just 23p. It currently trades at 49p. 

There are now strong signs that the firm is heading back to some degree of normality. For the 19 weeks to 15 May, sales at Wagamama were up 15% compared to the same period in pre-pandemic 2019.

What’s more, its pub sales increased by 10% on the same basis. I’m also encouraged by the fact that net debt has fallen by £6m since the end of 2021. If these trends continue, the share price could also increase. 

The business has a cash balance of £220m, which would place it in a strong position in the event of any further lockdowns.

Inflation is a risk to this company, however. It has forecast that food and drink inflation could reach 9% or 10% and this could eat into future balance sheets. 

Mitie Group

The second penny stock that I’m considering is Mitie Group (LSE:MTO), a firm that specialises in outsourcing and facilities management.

Currently trading at 64p, the business announced in June that it was reinstating its dividend. It will pay 1.8p per share and I find this potential income stream attractive. Furthermore, the company simultaneously initiated a £50m share buyback scheme, an indication that it’s financially healthy.

Recent contract wins from the likes of Netflix and Hammerson have complemented its current contracts at UK military bases overseas. 

This has resulted in a swing from a 2021 fiscal year pre-tax loss of £14m, to a pre-tax profit of £52m for the 2022 fiscal year. 

Revenue also increased by 58% over the same period, indicating that demand for facilities management is recovering. There could be even more growth in this sector as more offices reopen in the future.

The business is, however, under investigation by the Competition and Markets Authority (CMA) over a Home Office contract. If any foul play is found, this could dent the share price. 

I think that these two penny stocks could see their share prices growing sharply in the coming months, given greater demand for restaurants and facilities management. With both sectors likely set for continued growth, I’ll soon be buying shares in both, while always being aware of the risks.       

Robust update

Let me share the details. For the third quarter of the current financial year, which is the three months ending 31 December 2021, the company saw a solid 51% increase in revenues compared to the same time last year. A little over 10% of this was from Covid-19-related contracts, which was higher than expected. The company, which provides facilities management services, and that includes cleaning services, saw increased demand in these during the pandemic. 

In light of this, the company now expects operating profit of £160m-£165m, up from £145m-£155m earlier. This is the second time in the past year that the company has upgraded its profit forecast! If that is not a reason for the stock to rally, I do not know what is. 

Stumbling blocks for the penny stock

On the other hand, I do see two stumbling blocks to further increases in the stock’s price. The first is that the increase due to Covid-19 contracts was a one-time bump up. This might not be present next year, which in turn could reduce the company’s growth. Of course, it is possible that as the recovery gathers pace, the company’s fortunes could stay resilient. But I am not holding my breath. This is especially so considering that the company has run-up losses a couple of times in the past five years.

Next, its share price has already risen quite a bit. The stock is presently trading at a price-to-earnings (P/E) ratio of 34 times, which is fairly high if you ask me. Some of the most robust FTSE 100 stocks are trading at lower P/Es right now. Basically this says to me that the company’s profit increase is probably already priced in. This in turn means there is limited scope for its stock price to rise. 

Also, its share price is still way below its pre-pandemic levels. If it were really on a rising curve, I think it would have moved way past by now given the strong showing in its financials. To be fair, part of the ostensible decline is because it had a rights issue in July 2020. This reduced its per share price in one go. However, it has had plenty of time since to recover, which has not happened. In the last six months, in fact, it has fallen. Added to this is its elevated P/E, which makes it hard for me to imagine that the stock has won investors’ favour. 

Would I buy the FTSE 250 stock?

I still think this is a good stock for me to buy for the long term. But just to get a better idea of where it is at, I will wait until the next financial release to figure out a good time to buy it. 

As such, here are three top penny stocks I would acquire for the year ahead. 

Stocks to buy in 2022

The first company is the photo booth and coin-operated washing machine business Photo-Me (LSE: PHTM). I have always liked this enterprise because it is highly cash generative. Once it has bought and installed its photo booths, it does not need to spend significant sums maintaining the asset.

As a result, the company has a robust balance sheet and relatively attractive profit margins. It has also paid out a lot of cash to investors with dividends in the past. The firm last paid a dividend in 2018. As profits rebound after the pandemic, I think the corporation will likely look to restore its payout. 

Unfortunately, Photo-Me also has some challenges to overcome. Consumer trends are unpredictable, and the market is becoming more competitive. These are the biggest threats to the group’s business model right now. It has been able to navigate these threats in the past, but past performance should never be used to guide future potential. 

Penny stocks for growth

One theme I am building exposure to in my portfolio for 2022 is construction. The sector has quickly recovered from the pandemic, which is good news for companies like Speedy Hire (LSE: SDY). 

Analysts believe the company’s earnings will jump around 30% this year and a further 20% in 2023. This will take profits to a multi-year high. In fact, if the corporation hits these projections, it will earn more in the next two years than it did in the last six. I think these numbers illustrate the company’s potential over the next couple of years. 

Of course, there is no guarantee the company will hit these growth targets. If the economy starts to struggle again, the construction sector will be the first to suffer in any downturn. Speedy’s growth could come shuddering to a halt in this scenario. This is the most considerable risk facing the corporation right now. 

A return to outsourcing

The final company I would buy for my portfolio of penny stocks is outsourcer Mitie (LSE: MTO). Over the past couple of years, this company has struggled to earn a consistent profit. That will change over the next two years, according to City analysts.

If the corporation can return to profit and stay there, I think the stock deserves a re-rating. The shares are selling at a single-digit price-to-earnings (P/E) multiple. If the company returns to growth, the market may reward the stock with a higher group multiple. This could lead to a substantial return on the current share price. 

Still, this is far from guaranteed, which is why I would only buy the stock as a speculative position for my portfolio. Some challenges it could encounter as we advance include higher wage costs resulting from inflation and higher interest costs. 

DX Group: trading suspension on the horizon

The first of them is DX Group (LSE: DX). It provides mail and parcel delivery services in the UK and Ireland. The company’s share price has seen an unbelievable 37% drop in share price in today’s trading so far. It is now at the lowest levels seen in a year. It had reached multi-year highs earlier this year. But all the progress has completely been wiped out now. 

And I am discouraged about why this is happening as well. DX Group is undergoing an internal corporate investigation. Because of this, it was unable to publish its annual report in time. It further says that it will not be able to do so before 2 January 2022. By then six months would have elapsed from the end of the financial period in consideration. As per the rules of AIM, where the stock is listed, this would result in trading suspension in the company’s shares. This can only be lifted once the report is published. 

There is no way of knowing what the investigation will reveal. Also, we do not know when the company will publish its annual report. So, I think it is clear why the share price has crashed. Also, I do not think that we can hold out much hope for the coming days. This is a pity considering that for the full-year ending 3 July 2021, the company reported robust growth. It reported a 16% increase in revenue from the year before and it also swung back into profits. I am not going to buy it now, but it is still on my watchlist. 

Mitie Group: buy on dip

Another penny stock I have long liked is the FTSE 250 facilities management services provider Mitie Group (LSE: MTO). Its stock price is still around 60% higher than what it was last year, but it too lost some momentum recently. It released its results last week for the six months ending 30 September. The next day, its share price fell 8%. However, it has started inching back up. And I reckon it could rise more. It does say that its expects short-term Covid-19 related contracts to reduce “significantly”. But I do not see that as reason enough for the share price to drop.

The rest of the results look pretty good to me. Its revenue is up 36% and its operating profits have increased by over 10 times from last year. It also expects a stronger second half of the year, which bodes well for its stock price. I’d still buy it while it is still low. 

Cineworld: a FTSE 250 stock that could explode soon

The Cineworld share price has lost much of the value it had regained earlier in the year. It is at almost half the levels it was at in May at around 65p. But that could change soon. In another article I wrote about it today, I talk about how 2022 could be the year for the Cineworld share price. 

The pandemic is on the wane, stock markets are on fire and at the macro level, the entertainment sector is growing at a fast clip. All of this points exactly in one direction to me, and that is a possible share price explosion for the stock. Of course all these trends are still developing, so a lot can still go wrong. But I believe things will go right, which is why I have bought it.

Mitie Group: the penny stock is set to make profits 

FTSE 250 facilities management stock Mitie Group has already shown plenty of promise. Its share price has more than doubled over the past year. It remains a penny stock for now though, with a value of around 70p. 

It had fallen into losses in the recent past, which is a bit of a downer. But guidance for 2022 is positive, as it expects to make a profit. The company’s cleaning services have been in demand through the pandemic, and could well remain so as we move into the next year as well. Its other businesses like engineering and catering could pick up too now, as business around the world is getting back to usual. 

UK Commercial Property Investment Trust: property play

Another FTSE 250 penny stock I like is the UK Commercial Property Investment Trust (UKCM), which trades at around 77p right now. The stock had a price of sub-100p even before the pandemic started. And it has regained much of the value it lost in last year’s crash. But it still has some way to go. In fact, I think that in 2022, it may just lose its penny stock status. 

After taking a hit to profits in 2020, it reported a healthy earnings increase for the first half of this year. Moreover, the outlook for UK’s commercial property sector is getting better, as I pointed out in the context of another real estate investment trust (REIT) Hammerson a few days ago. 

What I’d buy

While all of them are great stocks, I cannot buy each and every stock at the same time. I have already bought Cineworld, so I will continue to hold it. The prospects for Mitie Group as well as for UKCM look good, but I am more inclined to buy the former right now. As far as REITs go, I am actually interested in buying FTSE 100 stock Segro right now, otherwise, UKCM would have been on my list too.  

But I would not have thought that this particular FTSE 250 stock could be brought into the clean energy discussion. After all, it is in a completely different segment. I am talking about the Mitie Group (LSE: MTO), which is best known as a facilities management and professional services company. 

Small acquisition, big significance

So why does it come into the renewables category? A few days ago, it acquired Rock Power Connections, which focuses on supplying power to EV charge points. This buy will enhance the company’s green energy solutions, which have so far involved installation of charge points. 

The acquisition is relatively small, with a maximum payout expected to be £14.5m to be paid by financial year 2023 (which ends on 31 March of that year). This includes an initial payment of £10m and two more of a maximum of £4.5m in total, which are linked to performance targets. That this translates into a maximum of 0.7% of Mitie’s revenues for the financial year 2021 puts it into perspective. 

The renewable energy push

Still, I think it is an important acquisition to highlight. This is because of the growing focus on renewable energy at present. The UK government has a clear 10-point plan for what it calls the Green Industrial Revolution. Big oil producers expect oil demand to start declining before the end of the decade. EV stocks listed on US exchanges exploded late last year. Poster boy Tesla has seen its stock price more than double since then, even with a recent dip. 

I think these trends underline the fact that this decade may well belong to clean energy stocks. So it sounds like a strategic move on Mitie’s part to get in on the trend, which could hold it in good stead as the sector expands fast over the next few years.

What I’d do

The company’s future looked bright in any case. In another article I wrote on penny stocks today, it is one of my picks for 2022. It is ready to make profits again after last year’s pandemic blow. And its revenues have been on the rise anyway.

The one concern that I do have about the stock, and one that I have mentioned earlier as well, is its inconsistency in profit making. It has fallen into losses in three of the last five years where full-year data is available. For this reason, I will continue to keep an eye on how its earnings shape up. For now though, I think the company looks like it is doing well. And its latest acquisition appears to be a step in the right direction too. It is on my buy list now. 

FTSE 250 stock with standout performance

I am talking about the Mitie Group (LSE: MTO), whose share price has more than doubled. This is in stark contrast with many other stocks that also recovered from November last year but that have seen sharp share price corrections in recent months. In fact, in another article today, I wrote about the FTSE 100 industrial metal miner Rio Tinto, which performed very well earlier in 2021, but whose share price has now dropped to almost the same levels as this time last year. 

Mitie Group sees a return to profits

So what is making the Mitie Group tick where others are seeing dwindling fortunes at the stock market? This question is pertinent for me, because as a potential investor I need to know if there is still steam in the stock or it is just being carried forward by momentum that will die out sooner or later. 

I think the company has something to say for itself. It provides facility management services that include security, cleaning, engineering, and catering among others. Partly thanks to the fact that the economy has come back to life and partly due to the fact that demand for its cleaning services remains elevated in a pandemic-conscious environment, the company’s prospects look bright. It has raised its profit guidance for the year ending 31 March 2022. 

Share price expected to double

Analysts are super-bullish on the stock. Even the most pessimistic analysts expect its share price to rise by 20% from the present levels in another 12 months as per numbers compiled by the Financial Times. And the most optimistic among them actually expect its share price to more than double again in the next year. If that happens, it will indeed be a standout stock that did well irrespective of whether a stock market rally was there or not. The catch of course is that analyst estimates are subject to change, because circumstances keep evolving. 

The red flag and takeaway

Speaking of which, there is one red flag I found when analysing the stock that indicates that all may not be smooth sailing for the company in the future. Mitie Group has struggled with profits in the recent past. It has reported losses in three of the past five years. So even if I ignore the last year considering that it was a difficult one for the entire economy, it still does not have a long-term trend of turning in profits.

But right now, things look good for Mitie. This penny stock continues to be a buy for me. 

Penny shares to buy now: Lloyds

A lot of people are surprised to learn that one of the UK’s biggest banks, Lloyds (LSE: LLOY), trades as a penny share. With its £35bn market capitalisation, the company is as far from being a tiddler as one can imagine.

But investors soured on the bank during the last financial crisis and its shares have limped along in penny share territory ever since. So why would I add more Lloyds to my portfolio?

First, I think the bank’s strong brand and entrenched position in the UK banking market should give it a competitive edge for years to come. Secondly, I like the simplicity of its business model when compared to some other banks. It is focussed on retail and business banking in the UK, meaning it is less exposed to the risks of exotic banking products and missteps in distant markets. There are still risks, though. For example, an economic downturn could increase mortgage defaults, hurting Lloyds’ profits.

Photo-Me and a changing market

Think of passport photo booths and it can seem like stepping back to another era. With the growth in digital photos and current fall in international travel, passport photo booths might not seem like a growth business.

But key player Photo-Me (LSE: PHTM) runs more than just photo booths, and has been rejigging its portfolio to match changing demands. One big hit has been its laundrette machines in locations such as filling stations. Not only that: photobooths are doing well again. It was their stronger-than-expected performance recovery which led to the company upgrading full-year profit forecasts in August. Photo-Me now expects pre-tax profits of £25m-£30m before exceptional items. That’s around 6.5p-8p per share.

Currently, Photo-Me shares trade for about 65p each. I think that looks cheap given the company’s growth prospects. As well as looking for capital gains, I would also hope that the cash generative company could return to paying dividends in future. But one risk is fresh lockdown restrictions in some markets reducing shopper numbers in the areas where Photo-Me has its machines. That could reduce both revenues and profits at the company.

Penny shares to buy now: Mitie

Another name on my list of penny shares I’d consider for my portfolio is facilities manager Mitie (LSE: MTO). Over the past year, the shares have more than doubled. But they are still firmly in penny share territory. I think there could be further upside, which is why I would consider adding them to my portfolio.

As the dramatic price history suggests, Mitie comes with risks. Last year’s rights issue was dilutive. While it helped the company to strengthen its balance sheet, it is a good reminder that any future liquidity challenges could lead to further shareholder dilution.

Set against that is the attractiveness of Mitie’s business, which last year grew revenues to £2.6bn. The pandemic was a challenge, but the couple of years before it suggested Mitie had found a way to make money again after a period of losses. I like its long-term role in key infrastructure. While it may not be a glamorous industry, such facilities are important to a range of organisations. They will likely continue requiring management for years or decades to come. If Mitie can demonstrate renewed profitability, I think the Mitie share price could rise. A trading update last month was upbeat and the company upgraded its profit guidance for the year.

Penny shares with healthcare exposure

Healthcare is an area where I expect continue demand growth. One penny share that offers exposure to the long-term growth of healthcare is Assura (LSE: AGR). It’s a property company that specialises in renting to healthcare tenants such as doctors’ practices.

I like Assura’s business model because it involves long-term leases with reliable tenants who are able to pay their rent. Assura has passed the benefit of its success onto shareholders, with the shares currently yielding 3.9%. In recent years the company has consistently grown its dividend, and it made no exception during the pandemic. It pays out on a quarterly basis and so could be a welcome passive income stream to add to my portfolio. Dividends are never guaranteed, but Assura’s distribution history and cashflows boost my confidence in its attractiveness as an income pick.

One risk I see here is politics. Healthcare pricing and profits can be a controversial topic. That could suddenly limit the profitability of a business as heavily exposed to healthcare clients as Assura.

Stagecoach and a possible bid

One of the penny shares I hold in my portfolio and would consider buying more of is bus and coach operator Stagecoach (LSE: SGC). The shares have fallen around 3% today after the company announced a lengthened timetable for possible merger talks with rival National Express. Over the past year, though, Stagecoach shares have been in the fast lane, adding 86%.

Any merger proposal could spark a bidding war, which could herald more upside potential for the Stagecoach share price. But even if no bid materialises, I continue to see Stagecoach shares as attractive. It has a wide route network across the UK, often with little or no competition from other public transport providers. Transport is critical to national mobility, so the industry also benefits from a range of subsidies. During the pandemic, for example, that helped it fund services even with low passenger numbers.

There is a risk, though, that if a bid doesn’t materialise, investor sentiment will worsen. In that case, the Stagecoach share price might fall even if business results are sound.

Mitie Group upgrades profit guidance

The first reason why I think so is its numbers. In its recent trading update, it upgraded its operating profit guidance range to £145m-£155m for its current financial year, which ends on 31 March 2022. This is more than double the £63.4m seen the year before. 

Last year was atypical because of Covid-19, so it is not entirely comparable to any other year. However, the projected number is substantially higher than even the year before the pandemic, when it stood at £86.1m. This latest forecast reinforces the positive outlook the company put out when it released its annual results in June as well. In particular, its contract renewal rate was at an all-time high, which gave a lot of hope.

Mitie Group divides its revenues into three streams. These are cleaning, security and office services (like document management and front-of-house). Last year, when there was little work done in offices compared to a usual year, it resulted in a dent in the company’s financials. However, some of the segments like cleaning and security picked up soon enough and that has continued into the current financial year. 

Credit facility on better terms

The company has also reported receiving a new revolving credit facility. It can make use of an amount adding up to £150m for four years. It replaces the previous RCF that was in place when the pandemic began. The new one is also on better terms than the earlier one, the company said. And it lowered its debt level last year too. So, it is no surprise that it has secured the facility. But it is good to know of its availability considering that we are not entirely out of the pandemic yet. Today, I see Mitie as a largely healthy company with strong prospects. 

Reduced activity as pandemic recedes

The one downer in Mitie’s update was regarding the next year. The company said that it was upgrading the current financial year’s profit outlook based on its performance in the first half. H1 got a fillip from its Covid-19 contracts. But they are expected to slow down in the second half of the year as the pandemic recedes. The outcomes for the business during this time are dependent on the ongoing economic recovery. If it turns out to be weaker than expected, there is a likelihood that the company’s numbers could disappoint in the following year.

Would I buy the penny stock? 

However, we do not know if that will happen. So far there are more signs of recovery than not. The latest monthly numbers do show a pause in the UK economy’s growth, but that could be temporary. For now, I think Mitie Group stock has a fair bit of potential and its share price could rise further. The penny stock remains a buy for my portfolio. 

#1 – Lloyds

The Lloyds (LSE: LLOY) share price has increased almost 30% this year and more than 55% during the last 12 months. But I reckon this penny stock could rise further. It released it’s interim results recently, which looked promising.

The bank’s profitability improved significantly. This was due to its net credit impairment. So as the UK economy starts to recover from the pandemic, Lloyds can release the provisions it set aside for bad debts. This is a good thing. And as businesses start to reopen, their credit performance should improve, thereby the bank can released more of its provisions.

Another reason why I’m bullish is due to the dividend. Now that the regulators have given banks the green light to restart income payments, Lloyds has started paying a dividend. It has also said that it’s reintroducing a progressive and sustainable income policy.

This is great news, especially for the patient shareholders who have held the stock through the pandemic. Prior to the coronavirus crisis, Lloyds shares had a dividend yield of almost 5%. Based on this, I’d expect the income to increase back to pre-pandemic levels over time.

What I also like is that it’s diversifying its business. It recently purchased Embark, which is a pension and investment platform. This should boost its wealth management offering and add another source of revenue.

But the bank is still tied to interest rates and these are at rock bottom. I don’t expect this to rise any time soon. This could place pressure on revenue and profitability. Also there’s no guarantee that the dividend will rise. Especially if the UK economy doesn’t bounce back as expected.

#2 – Mitie

Mitie (LSE: MTO) is another one of my best penny shares to buy now. The stock has soared by over 70% in 2021 so far. It has also increased by 85% is the last 12 months. But I reckon the share price has the potential to rise further.

At the end of last month, the company issued its first-quarter trading update. And in a nutshell, it was a positive one. Its revenue for the three-month period doubled following the acquisition of Interserve.

If the purchase is excluded, then sales improved by 36% to £618m compared to last year. This is still pretty impressive. The integration of Interserve is progressing well and Mitie expects to complete this and move to “business as usual” by the end of 2021.

What I also like about the FTSE 250 company is that it’s winning new contracts and renewing existing ones. The outlook is rosy as well. The firm said that the first-quarter performance was boosted by short-term Covid-related contracts. But its recent wins, along with the reopening of its customers’ premises and the recovery of the economy, should support “strong underlying trading momentum”.

Of course, there’s no guarantee this will happen. The colder months are around the corner and this gives coronavirus a natural advantage. Another Covid-19 variant could impact Mitie’s recovery and the stock.

But it’s encouraging is that it expects to deliver its full-year forecast. This should boost the Mitie share price. Hence, I’d buy this penny share.