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.

That is why I am always looking for new penny stocks to add to my portfolio. Here are three companies that I would buy today and hold for a decade based on their growth prospects. 

Penny stocks to buy and hold

The first company on my list is the automotive retailer Lookers (LSE: LOOK). Over the past year, second-hand vehicle prices have exploded as supply chain issues have reduced the supply of new cars.

This has resulted in bumper profits for Lookers and its peers. According to analysts, the company is on track to report net income of £66m this year. This trend will continue in 2022, analysts believe. 

Based on current earnings estimates, the stock is trading at a forward price-to-earnings (P/E) multiple of just 6.4, which looks dirt-cheap. 

This income infusion should help the company strengthen its balance sheet and fund further expansion. These are the reasons why I think the corporation could make a great addition to my portfolio of penny stocks for the next decade. 

Risks the company could encounter include rising costs and further supply chain challenges. These could hit growth over the next couple of years. 

Economic recovery

The UK economy is recovering from the pandemic, and the construction industry is leading the charge. Severfield (LSE: SFR) is my favourite company in the space. The structural steelwork manufacturer will report earnings growth of 22% in the current financial year and 12% in 2023, projections suggest. 

Rising earnings and a robust order backlog should put the organisation on a firm footing to expand over the next decade. However, despite this potential, the stock is trading at a relatively undemanding forward P/E multiple of 9.4. The shares are also expected to yield 4.4% in the year ahead as the company returns some of its windfall to investors. 

Unfortunately, growth for the next couple of years is not guaranteed. Rising energy prices and commodity price inflation could hit Severfield’s bottom line. 

Financial experience

The final corporation I would add to my portfolio of penny stocks is the financial services company Record (LSE: REC). 

After around six years of treading water, the enterprise is expected to report big earnings growth this year. After winning a series of new contracts, earnings are expected to increase by nearly 60% in fiscal 2022. Growth of 20% is projected in 2023. 

And these rising earnings should provide the company with additional capacity to chase new business in the years ahead. It has a strong balance sheet with no debt, and the stock also supports a dividend yield of 5.3% at the time of writing. 

Despite its potential, I am wary of the fact that Record is a relatively small business with a market capitalisation of just £154m. This could put it at a disadvantage to its larger City peers, which may be able to provide clients with a similar service at a lower cost. 

Penny stocks to buy

The first company on the list is the private jet broker Air Partner (LSE: AIR). Over the past two years, this organisation has benefited from two substantial tailwinds. Rising demand for cargo transportation, and higher demand for private jet services from the rich and famous, has helped the group outperform expectations. 

According to its latest trading update, during the six months to the end of July, the company’s underlying pre-tax profit jumped to £3.8m, up 26.7% on pre-pandemic levels. 

The additional cash flow from operations gives the group the financial resources to pursue bolt-on acquisitions to expand its operations. In the past, the group has diversified into different sectors in the aviation industry by reinvesting cash generated from its existing operations.

In August, Air Partner acquired Kenyon International Emergency Services, a leading emergency planning and incident response company.

As long as management continues to make sensible acquisitions, I think this is one of the best penny stocks to buy today. I would not hesitate to add it to my portfolio. 

Some challenges it could face as we advance include economic uncertainty and competition. Compared to the multi-billion pound companies that dominate the aviation industry, it is a relatively small business. 

International expansion

I would also acquire international currency and derivatives manager Record (LSE: REC) for my portfolio of penny stocks. 

Like Air Partner, this company is also experiencing a bit of a growth spurt. During the six months to the end of September, revenues increased 38% year-on-year. The total value of assets managed by the group increased by 7% to £62.4bn.

And to capitalise on this growth, the company is also launching new products. By doing so, it has increased exposure to higher revenue and more scalable products. The group has also launched a sustainable finance fund in collaboration with UBS Global Wealth Management. 

I think these initiatives will only help the company build on the growth achieved over the past year. That said, Record does need to keep innovating, especially in the highly competitive financial services space. With competitors like UBS, which is one of the largest investment banks in the world, Record cannot afford to take its market share for granted. 

Nevertheless, despite this challenge, I think the group has tremendous growth potential over the next few years. With profits booming and a cash-rich balance sheet, Record has the potential to capitalise on opportunities as they present themselves. 

Activity at its photo booths has shown signs of strong recovery of late. But this isn’t why I’d buy Photo-Me today. I’d snap it up as recent restructuring gives it exposure to some other fast-growing self-service businesses. As well as providing self-service laundry services the penny stock operates food vending machines and digital printing kiosks. I’d buy it despite the threat of rising Covid-19 crisis to footfall in areas where its machines are located.

The leisure giant

Marston’s (LSE: MARS) is another dirt-cheap UK share on my radar right now. That’s even though food price inflation is currently running at “terrifying” levels, according to industry experts. The pub operator trades on a forward price-to-earnings (or P/E) ratio of just 8 times today, a reading I think makes it ultra-attractive for long-term investors like me.

A stark warning from Ian Wright, chief exec of the @Foodanddrinkfed about impending food price inflation.
“In hospitality which is a precursor of retail it is currently running somewhere between 14% and 18%. That is terrifying,” he told @CommonsBEIS.

— Joanna Partridge (@JoannaPartridge) October 19, 2021

Britons are spending an increasingly large portion of their disposable incomes on eating out and drinking. This naturally bodes well for Marston’s, which operates 1,500 pubs, eateries and hotels the length and breadth of the country. The leisure giant noted just last week that it has witnessed “a continuous improvement in trading” since Covid-19 restrictions were lifted on 12 April.

Read all about it

I also think Smiths News (LSE: SNWS) could be worth serious attention. Its forward P/E ratio sits even lower than that of Marston’s, at below 4 times. This penny stock is the largest magazine and newspaper distributor in the UK. So it could be argued that it’s in severe peril as digital publishing takes over from traditional print media.

Still, at current prices I think Smiths News could be a speculative stock worth buying. Attempts to improve efficiency to offset falling volumes have so far proved extremely successful. And as my Foolish colleague Roland Head recently commented, the company’s massive transport network provides opportunities to explore other profits-enhancing activities.

Another penny stock on a roll!

Meanwhile currency manager Record’s (LSE: REC) share price has exploded during the past 12 months. Yet it still looks pretty cheap in my opinion, the business trades on a forward PEG ratio of just 0.2. Trading here is going from strength to strength and total assets under management equivalents (or AUMEs) rose 5% in the three months to June. I think its move into sustainable investments could reap rich rewards too as responsible investing becomes ever-more-popular.

Record’s drive to modernise and diversify is resulting in massive costs at the business. This could go some way to explaining its ultra-low valuation. But at current prices I still think it’s an attractive penny stock to snap up today.

Finsbury Food

Bakery manufacturer Finsbury Food (LSE: FIF) is first up. The company produces a range of cakes, bread and snacks. Its share price has been in fine form over the last year, rising 54%. Based on its most recent trading update, I’m inclined to think this might continue. 

Back in July, FIF announced that revenues in the second half of its financial year had climbed 9.1%. That’s despite its foodservice division still being impacted by Covid restrictions. Trading overseas was also markedly better. Revenues here jumped 27.4%, due in part to lockdowns in Europe beginning earlier.

All told, Finsbury believes recent improvements in trading will allow it to eventually report revenues of £313.3m for the full year to 26 June. That’s higher than analysts were expecting. It also brings sales back to pretty much where they were before the pandemic took hold.  

Factor in this news with a valuation of just 10 times earnings and I suspect the shares could rise above £1 soon. That said, rising cases of the Delta variant could still prove problematic. So, while I would be comfortable buying today, I also don’t see this as a risk-free investment.

Sureserve

Shares in energy support services firm Sureserve (LSE: SUR) could also reach £1+ soon, I believe. Involved in the construction and maintenance of services to homes, schools and commercial buildings, its valuation has more than doubled in 12 months. 

I expect more to come, especially after the announcement today that two of its subsidiaries have extended their contract with affordable housing care provider The Guinness Partnership. This is for a minimum of five years and could actually last for a decade. Assuming the latter, SUR has estimated this agreement will bring £140m in sales revenue.  

Like Finsbury, shares in Sureserve look a good deal at 14 times forecast earnings. One thing worth noting, however, is the ‘free float’. The fact that only 68% of the company’s stock is trading on the market could make for a rollercoaster ride. It might only take a bit of buying or selling to make the share price move violently. 

Again, I see this as a cautious buy for my portfolio.

Record

A final company whose time as a penny stock may be up shortly is currency manager Record (LSE: REC). Its share price has soared 160% over the last year to almost 91p a pop.

I think REC can gain another 10% or so in 2021. In July, the company announced that its new financial year had “started well“. Assets under management equivalents rose by 5% in Q1, supported by more net inflows and a new fund launch. 

However, REC has a smaller free float than even Sureserve (just 30%). Again, this could be beneficial if the company does all the right things. However, the opposite is also possible. While not exactly overpriced, REC’s valuation is also higher than the other penny stocks mentioned at 18 times earnings.

Notwithstanding these points, I’d still buy. The company’s balance sheet looks solid and returns on capital have been consistently excellent. Both are qualities I look for. 

Here are three such low-cost lovelies I’d happily buy myself.

A cheap UK share for tough times

You might not have heard of UP Global Sourcing Holdings (LSE: UPGS). But the odds are pretty high you’ve used one of this company products. This low-cost UK share makes ironing boards, kettles, scales, toasters and other everyday products that can be found around the home.

Its focus on need-to-own goods gives it terrific earnings visibility during economic upturns and downturns. And much-loved brands such as Russell Hobbs and Salter give profits forecasts an extra layer of protection. Although, of course, the company isn’t totally immune to the threat of competition.

At current prices of 214p per share, the small-cap trades on a forward price-to-earnings growth (PEG) ratio of just 0.7. A reading below 1 suggests a UK share could be undervalued by the market.

A top penny stock I’d buy

Record’s (LSE: REC) another cheap UK share that’s high on my watchlist right now. At 84p per share, this penny stock trades on a forward PEG ratio of just 0.3. The currency and derivatives manager has recently slumped in price because investment in its growth strategy has taken a huge bite out of profits.

But there’s a lot to like about this low-cost UK share, in my opinion. Investing in its products and IT systems should pave the way for strong and sustained long-term growth. And right now, assets under management equivalents (AUME) have just struck record highs. City analysts think annual earnings will leap 84% this year alone. I’d buy Record despite the ever-present threat of changing regulations to future profits.

The building products giant

I’m also sorely tempted to splash the cash in Michelmersh Brick Holdings (LSE: MBH) today. As the name suggests, this cheap UK share’s operations centre around making bricks. And it’s doing a roaring trade at the moment, thanks to rocketing demand for newbuild homes in Britain.

What’s more, production at the business has recently outperformed expectations as it’s sought to capitalise on what it calls a “very active” construction market. I expect the homes market to remain strong as low interest rates, government support for first-time buyers, and intense competition among Britain’s lenders should keep the housing market boom going.

Today, Michelmersh trades at 125p per share, leaving a forward PEG ratio of 0.3. I think this makes the brickbuilder a top buy, despite the threat that a fresh economic downturn could pose to building product demand.

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. 

With this in mind, here are what I believe to be three of the best penny stocks to buy now.

Growth-focused penny stock

Trading at just under a pound, as I type, is Record (LSE: REC). This is a business that tries to reduce the impact of currency movements on institutional clients’ investment portfolios. 

Unfortunately, Record’s recent move to invest for growth has been at the expense of a “short-term decrease in profitability.” However, the firm is still cash-generative and boasts a healthy balance sheet. The payment of a special dividend smacks of confidence too. 

Speaking of which, Record started its new financial year in April with its highest recorded Assets Under Management Equivalents (AUME). It’s also been developing new products, including the recently-launched Emerging Market Sustainable Finance Fund.

Aside from this, Record also scores well on the quality metrics, such as returns on capital and margins. These are high, relative to the market in general, and go some way to making up for industry risks, such as regulatory hurdles. Nevertheless, the latter still has the potential to knock the share price.

On a P/E of a little less than 20 for FY22, I think Record could be a good stock for me to buy now. 

Recovering well

Also featuring in my selection of the best penny stocks to buy now is retailer Topps Tiles (LSE: TPT). Unsurprisingly, this is a company that really suffered at the hands of the pandemic. However, the tide has clearly turned.

Last month’s update said the company’s retail business had “performed well” in Q3, helped by the reopening of stores in April. Topps went on to say it expected to benefit from “high levels of consumer demand” going forward as the home improvement boom continues. A return to sales growth at its Commercial business is also expected.

Of course, hindsight shows that March 2020 was the time to pile in. The shares have multi-bagged since then. However, a P/E of under 15 now still doesn’t feel unreasonable for a debt-free company with an encouraging outlook. That said, its cyclical nature coupled with warnings that Covid-19 could get worse before it gets better makes this a cautious rather than automatic buy.

Ahead of expectations

A final pick is EKF Diagnostics (LSE: EKF). For under a pound a share, I can buy inmto a company that achieved record sales and profits in 2020.

According to May’s AGM statement, this form has carried on into 2021, thanks to “a very meaningful recovery in trading.” EKF’s core business “performed more strongly than expected” in Q1, again thanks to ongoing demand for sample collection devices generated by the pandemic. Indeed, the company now believes that full-year numbers are likely to be “comfortably ahead of already upgraded management expectations.” 

Naturally, all this hasn’t gone unnoticed by the market. In the last year, EKF’s stock jumped by 72% in value and now trades on a forecast P/E of 28. Unfortunately, this high valuation could mean the share price falls heavily if the company disappoints.

With a solid growth strategy and balance sheet, however, I’d still buy EKF today.

The currency and derivatives manager has struggled for momentum after closing at its most expensive for more than a decade in early May, at 95p per share. And a chilly reception to today’s trading statement has sent the Record share price to 86.5p per share, down 6% on the day.

It’s worth remembering though that Record is still up around 140% over the past 12 months. Does this represent a great dip buying opportunity for UK share investors like me?

Record records record AUME

Record’s share price has slipped after the business announced a meaty fall in full-year profits. For the 12 months to March, profit before tax clocked in at £6.2m. This was down 20% year-on-year.

The company’s revenues dropped fractionally in financial 2021, to £25.4m from £25.6m previously. Management fees increased 8% year-on-year to £24.9m. But gains here were more or less wiped out by a sharp drop in performance fees. For the full year, these slumped to £100,000 from £1.8m in fiscal 2020.

Last year was far from a washout for Record however. Assets under management equivalents (or AUME) hit all-time highs of $80.1bn in fiscal 2021, up 37% from the prior 12-month period. This included net inflows of $9.7bn, soaring from $4.6bn previously.

Record paid a 2.3p per share dividend for the full year, unchanged from the previous 12 months. However it paid a special dividend of 0.45p, up from 0.41p in financial 2020.

Time to buy the UK share?

Looking ahead, chairman Neil Record said: “We start the year on our highest ever level of AUME, which is more diversified across our higher-margin products and provides us with an excellent platform for growth in financial 2022.”

Record noted that the company has been developing products in collaboration with its clients, one of which — the Record EM Sustainable Finance Fund — is set for launch later in June.

He also said: “The group continues to be self-financing, cash-generative and completely independent with no external debt,” adding that “the board remains confident that its change in strategic direction is the correct way forward for the long-term growth and success of the business.”

These changes include a greater emphasis on product diversification and modernising its IT infrastructure.

City analysts believe Record will bounce back into earnings growth in financial 2022. A 63% bottom-line rise is currently forecast, leaving the business trading on a forward price-to-earnings growth (PEG) ratio of 0.3.

It’s true that Record faces significant competitive and regulatory pressures that cloud its long-term earnings outlook. Still, I think its recent change of direction — allied with Record’s dirt-cheap share price — make the business an attractive stock to buy today.

As such, I’m happy to invest in these companies but will only deploy a small amount of money, such as £3,000, into a well-diversified portfolio. I think this will help me reduce risk while maximising profitability. 

With that in mind, here are three penny stocks I’d buy with £3k.

Penny stocks to buy 

The first organisation on my list is the engineering group Lamprell (LSE: LAM). A leading provider of fabrication, engineering and contracting services to the offshore and onshore oil & gas and renewable energy industries, the company has struggled in recent years. The falling oil price has caused oil producers to cut expenditure. Lamprell’s sales have plunged as a result. 

However, the company has recently been growing its renewable energy business. I think this will be a cornerstone for group growth as we advance. I also think the business will benefit from the general economic recovery over the next few years. Those are the main reasons why I would buy this penny stock for my portfolio now. 

The main risk the corporation faces right now is the risk that the economic recovery does not live up to expectations. This could translate into further losses for the business and its investors. 

Financial services 

Currency management firm Record plc (LSE: REC) handles currency risks for customers. In recent years, the group has been focusing on growing its higher-margin business lines. These efforts are expected to translate into earnings growth next year.

Analysts predict net profits of £8.5m in 2022, the highest level of income for the business in many years. That said, these are just projections at this stage. 

The company faces multiple risks that could limit its ability to meet this target. Competition in the financial services market could impact the group’s profit margins. Additional regulations may also lead to increased costs, which would affect profits.

Despite these challenges, I would buy the shares for my portfolio of penny stocks, considering its potential in the next few years. 

Digital inkjet technology

Xaar (LSE: XAR) develops digital inkjet technology, which is used for multiple printing applications. The group started to struggle in 2018, but it is forecast to achieve a steady recovery this year. This time last year, analysts were expecting the firm to lose more than £10m for the year. Losses of around £5.5m are now projected. 

These are only projections, and Xaar may never live up to its full potential. Still, I think the stock has tremendous potential. 

Of course, there is a significant risk the group will not meet City growth expectations. If it does not, investors may turn their backs on Xaar, as they did previously. The main risks to growth include high costs and competition. I will keep an eye on these challenges from now on.