Big rebound

But sometimes I see stocks lifting themselves from such depths, and I start to wonder if I’m looking at a potential bargain buy. Renold (LSE: RNO) is one that has just crossed my path.

Renold shares dipped as low as 4p in early 2020, and the company was worth very little. But since then the price has grown to 24.75p. The company is up to a £56m market-cap now. That’s still a bit marginal, but it’s more respectable.

Renold makes industrial chains and related power transmission products, and it’s been recording falling earnings for years. But results for the year ended March were headlined “Significant revenue and earnings rebound… Record order book… Continued net debt reduction“.

This is still a very small company. And it’s listed on the Alternative Investment Market (AIM), which is less regulated and generally more volatile. So I’m extra cautious. But I think it deserves closer analyisis.

Dividends too

Structural steel specialist Severfield (LSE: SFR) has seen its share price falling over the past 12 months. As I write, it stands at 57.8p.

The company saw earnings dip a little during the pandemic, but not by much. And last week, the firm put out an upbeat trading statement.

Several current contracts are “expected to deliver significant profits in H2“. And Severfield has a “UK and Europe order book which stands at £483m at 1 September“.

The biggest threat seems to be the current economic outlook. I suspect soaring inflation and rising supply chain costs are likely to impact every aspect of the construction industry.

But against that, I think Severfield’s forecast price-to-earnings (P/E) multiple of under nine looks cheap. Especially with dividend yields heading to 6% and above, based on market predictions.

Back to the shops

Hammerson (LSE: HMSO) shares have lost a third of their value over the past 12 months, dropping to 21.7p today.

The landlord invests in commercial properties, including shopping centres such as the Bullring/Grand Central in Birmingham. And just as the pandemic has eased, we now have crippling inflation, reducing the desire to go out spending.

But Hammerson did record a 154% rise in adjusted earnings in the first half, as like-for-like rental income increased 48%.

Disposals helped to get net debt down a little. It still stood at £1.7bn at 30 June though, which is a threat. Still, the company values its property portfolio at £5.3bn.

The dividend situation is a bit confusing. Hammerson declared an interim cash dividend of 0.2p per share, or an enhanced scrip dividend of 2p as an alternative. This should be the last enhanced scrip dividend alternative, so we can’t deduce much about future cash payments right now.

I’d wait to see the second half performance. But if we get back even close to pre-pandemic dividends, Hammerson could turn out to be a buy.

It looks like I am dealing with a turnaround situation, given the highs and lows in the stock price. But before I deal with that, there is something I need to address.

Renold is an AIM stock?

Renold—founded in 1879—makes power transmission products like clutches, couplings, gears and gearboxes, sprockets, and industrial chains. How can a company founded in the 19th century, whose shares were first admitted for trading on the London Stock Exchange (LSE) in 1946, be an AIM stock?

Renold was listed on the main market of the London Stock Exchange. But it moved its entire share capital and became an AIM stock in June 2019. Being on AIM means Renold does not have to make acquisition approaches public unless the target’s market capitalisation, net assets, or pre-tax profit is greater than or equal to 100% of Renold’s. On the main market, the limit is 25%.

Renold’s CEO explained the move would allow the company to “execute transactions more quickly, more cost-effectively and with greater certainty“. Shifting to AIM is part of a broader strategy to cut costs and grow revenues after years of struggle — a turnaround.

Chaining together a turnaround

Renold had suffered through years of disappointing revenue growth and deteriorating margins that hurt the company’s share price.

Renold revenue (in millions of pounds) and operating margin (%) from 1998 to 2022

In 2014, a three-phase strategic plan was formalised to turn around the company’s fortunes. Renold managed to increase its revenues from 2016 to 2019 — the year it became an AIM stock. Operating margins were also increasing, explained partly by moving manufacturing to China. This suggests the turnaround plans were working. Then the pandemic hit. However, 2022 revenues bounced back strongly, and margins held up. Importantly, sales per employee are increasing, and total overheads are coming down, a clear sign of increasing efficiency.

Renold key performance indicators from 2014 to 2022

Renold operates in a highly fragmented market, making bolt-on acquisitions easier to come by. Only 7% of its sales are from high-growth economies. So Renold has room to manoeuvre for growth. Can it make meaningful advances and drive revenues beyond all-time highs? I would like to see that happen before I buy, and there is a new strategic plan that might help do this. Also, the company is spending around £5.5m in cash to fund its pension for the foreseeable future, which might drag on its growth potential.

Right now, I will keep an eye on this AIM stock and see if some of my concerns are allayed, but I won’t be buying today for my Stocks and Shares ISA. Sometimes in investing, it pays to wait and see how things develop.

Industrial chains

As a quick introduction, Renold is a UK-based manufacturer of industrial conveyor chains as well as other machine components. With a worldwide presence, it serves many industries including but not limited to agriculture, construction, energy, and mining.

It is worth remembering that a penny stock is one that trades for less than £1. At current levels, Renold shares are trading for 24p. At this time last year, the stock was trading for 19p, which is to a 26% return over a 12-month period.

To buy or not to buy?

So what are the pros and cons of my buying Renold shares?

FOR: I’m buoyed by Renold’s history, presence, and profile, especially as a penny stock. The business has history stretching back to the 1800s and has impressively grown into a worldwide business. In fact, it derives most of its revenue from the Americas, and also serves the Chinese market too. Another plus point for me as a potential investor is that Renold has diversified its business model through offering a number of different flagship products. All of these products have multiple applications across a wide range of industries. This diversification could help boost performance and potential returns over time.

AGAINST: Current macroeconomic headwinds could pose a real threat to Renold’s growth and performance. Soaring inflation, the rising cost of raw materials, as well as the supply chain crisis could all have an impact. Rising costs could affect profit margins. Supply chain issues could have an impact on operations too. This is something I will keep a close eye on.

FOR: At current levels, Renold shares look dirt-cheap on a price-to-earnings ratio of just five. If I were to open a small position in the penny stock, I would not be risking too much of my cash.

AGAINST: One thing I did note from recent trading updates provided by Renold was the absence of a dividend. It said it is anticipating cost challenges linked to the macroeconomic headwinds noted above. Furthermore, it is investing cash in streamlining processes and working practices to support longer-term growth. I do believe Renold could pay dividends at some point in the future, however.

A penny stock I would buy

Taking into account the pros and cons, I would be willing to add a small number of Renold shares to my holdings. The shares look cheap, so I wouldn’t be risking too much money. Furthermore, city analysts are upbeat on the company’s earnings growth expectations in the coming years too. I believe Renold shares could provide stable returns in the long term as the business continues to grow.

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.

Here are three I’ve found that I’d buy for my portfolio today.

Under-the-radar growth

My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m business is one of a handful of companies that’s disrupting the currency services offered by banks by providing cheaper and faster services.

Argentex doesn’t serve the holiday travel market. Instead, the firm targets higher-value customers with more sophisticated requirements, such as institutions, companies, and high net worth individuals.

This is still quite a small business, but growth has been strong so far. Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit jumped 22% to £3.3m. The main risk I can see is that this is an increasingly competitive market. Argentex’s profit margins have fallen over the last 18 months, cancelling out some of its growth.

However, I think the risk of slowing growth is already priced into the stock. Argentex shares are trading on just 12 times 2022 forecast earnings and offer a 2.5% yield. This is a growth stock I’d be happy to buy for 2022.

This turnaround is delivering results

My next pick is industrial chain specialist Renold (LSE: RNO). Unlike Argentex, this British firm is more than 100 years old. Renold makes chains and related parts used for machinery such as cement mixers, conveyor belts, escalators, and train doors. It’s one of the oldest companies in this market. Renold’s products sell all over the world.

This business has been through a difficult patch over the last few years, but now seems to be back on track. The company’s adjusted earnings are expected to rise by a chunky 79% this year, as the turnaround kicks in.

If Renold delivers on this forecast, I think the stock looks quite cheap on just nine times forecast earnings. My only serious concern is that this business still has a sizeable £100m pension deficit. This requires cash contributions of around £5.5m each year.

I’d want to keep an eye on the pension situation. But Renold is certainly a penny stock I’d be happy to own.

Too cheap to ignore?

The last share I’m going to look at is currently priced at just four times 2022 forecast earnings. The shares are also expected to provide a chunky 6.7% dividend yield in 2022.

The company concerned is Smiths News (LSE: SNWS), which delivers newspapers and magazines to shops all over the UK. The company has a 55% share of the market and has been in business over 200 years.

I’m sure you’ve spotted the obvious risk here — sales of printed newspapers and magazines have been falling for years as readers move online. My guess is that this trend will continue.

This decline is an ongoing challenge for Smiths, but the company’s big market share means that it still handles enough volume to make money. Cash generation is good, and Smiths’ debt levels have been falling fast.

I think this penny stock is probably too cheap at current levels. For this reason, I’d be happy to add Smiths News to my portfolio today.

The firm makes industrial chains and torque transmission products which it sells worldwide. Customers include original equipment manufacturers, distributors and end-users in sectors such as manufacturing, transportation, energy, metals and mining.

The directors can trace the history of the business as far back as 1864. However, the important thing is the immediate and longer-term prospects. And on that front, the news is good.

Pleasing figures

On 10 November, the half-year results report contained a robust and pleasing set of numbers. The directors pointed to “significant” growth in revenue, a “record” order book and “strong” cash generation. The cash performance helped the company reduce its net debt by £4.5m, to £13.9m.

There’s no doubt there’s a large cyclical element to the business. So it’s good to see the company using cash in the good times to reduce its borrowings. One of the features of the trading record is volatility in earnings from year to year. Therefore, I’d want the balance sheet to be as strong as possible heading into any general economic downturn.

But there’s little sign of weakness in the firm’s markets right now. And, looking ahead, chief executive Robert Purcell said he’s confident about the second half of the year, but “cognisant of the very volatile and inflationary world we operate in.”

Nevertheless, City analysts expect a double-digit percentage increase in earnings for the trading year to March 2023, hard on the heels of a triple-digit rise in the current trading year.

Of course, estimates are not set in stone and it’s possible for the business to fall short because of future operational challenges. However, with the share price near 30p, the forward-looking earnings multiple is just below eight when considered against those expectations. And, on the surface, that valuation looks undemanding.

Preserving cash

However, shareholder dividends are absent. And the company decided not to declare an interim dividend because of economic headwinds, such as the well-reported supply chain issues, raw material availability and inflation. The directors also cited “continuing investment in equipment and revenue expenditure to improve the performance of the business” as reasons to forego the dividend.

But I reckon those are valid reasons for withholding the shareholder payment. The Renold business has undergone something of a transformation in recent years as it turned itself around. Part of the process involved shedding outdated and inefficient working practices among other things — no doubt those old inefficiencies were a consequence of the long history of the business.

Now, the enterprise strikes me as fighting-fit for the modern world. It’s trading well, earnings appear to be growing fast and I’m bullish about the general world economy. So I’m tempted to invest £1,000 in the shares. However, as outlined in this article, there are risks.

Renold 

I can currently buy shares in industrial chain supplier Renold (LSE: RNO) for just nine times earnings. That already looks a potential bargain given that the company’s customers are nicely diversified by sector and geography. However, this minnow also has a PEG (price/earnings-to-growth) ratio of 0.5. As a rule of thumb, anything at or below 1.0 tends to imply value based on that firm’s prospects. 

Recent results go some way to supporting this. Earlier this month, the company announced that it was continuing to see a recovery in revenues and orders following the pandemic. The latter rose 61.3% to almost £80m over the four months to the end of July. As such, RNO now predicts it will beat market expectations for full-year adjusted operating profit. 

This is not to say that an investment in this penny share is risk-free. The “much-lengthened supply chains” and “considerable raw material and transport cost inflation” mentioned in the last update could get worse before they get better. Even so, I reckon Renold is a cautious buy for my portfolio today.

Severfield

Severfield (LSE: SFR) produces about 300,000 tonnes of fabricated steelwork a year from its five UK sites and factory in India. This is eventually used in the construction of landmark buildings, stadiums, warehouses, hospitals and universities. London’s Shard and Wimbledon’s No.1 Court are examples. 

Right now, I can buy the shares for 11 times earnings. That compares favourably to valuations both within its industry and the market as a whole. The company also has a PEG ratio of just under 1.0. 

Then again, it’s worth me bearing in mind that demand for Severfield’s steel will clearly be linked to the overall health of the UK economy. It’s also worth noting that this has been a penny share for over nine years now. As such, I doubt this stock will fly anytime soon.

Still, it does offer a secure and decent dividend yield (3.7%). So, as a way of balancing out my more racy growth plays, Severfield appeals to me. 

Gem Diamonds

Diamond explorer and producer Gem Diamonds (LSE: GEMD) is a final penny share that, using traditional valuation measures, looks dirt cheap. It has a price-to-earnings (P/E) ratio of less than six for the current year. Other things I like are the net cash position and 3.8% dividend yield.

Then again, this low valuation isn’t a complete surprise. After all, any company in the mining sector has the potential to be highly volatile in price due to the cost and difficulty of extracting whatever metal or mineral it’s focused on. This is potentially compounded by where in the world drilling is taking place.

To be fair, GEMD digs in Botswana and Lesotho, which are considered to be generally safe. However, other risks include the growing popularity of synthetic diamonds among younger buyers.

So, while I like some of what I see here, I’m content to leave Gem Diamonds to those with stronger stomachs.

Off the chain

The Renold (LSE: RNO) share price has boomed on Monday following a positive reception to latest trading numbers. At 24p per share, the penny stock was last trading 23% higher from last week’s close.

Business is booming at Renold as the economic recovery takes hold. The industrial chain and transmission products maker said that “the strong momentum experienced in the fourth quarter of the last financial year has been maintained in the new financial year.” This meant that revenues clocked in at £62.5m for the four months to 31 July, up 13.6% year-on-year. At constant exchange rates, sales were up a fraction below 20% from the corresponding 2020 period.

Renold racked up orders worth £79.7m, too, up 61.3% on an annual basis or 69.3% at stable exchange rates. Moreover, it said that its total order book stands at all-time highs of £70.5m right now.

As a consequence of this strong trading Renold said that it expects adjusted operating profit for the half- and full-year “to be higher than both market expectations and the equivalent prior year period.” However, it added that supply chain disruptions, allied with rising raw materials and transport costs, have been causing some uncertainty in its markets.

Despite today’s share price jump, Renold still offers decent value for money on paper. The AIM company trades on a forward price-to-earnings growth (PEG) ratio of 0.5 (a figure below 1 suggests that stock could be undervalued by the market). I therefore think this UK share could be a great way to play the steady rebound in the world economy. Its products are used in a wide variety of applications such as on food production lines, on underground railway trains and on a broad selection of construction equipment.

Another soaring penny stock

Abingdon Health (LSE: ABDX) is another UK penny stock that’s soaring in start-of-week trade. At 70p per share the healthcare play is trading 13% higher on the day following news concerning its coronavirus antibody tests.

Abingdon said that its BioSURE Covid-19 IgG Antibody Self Test had been launched today. This follows the signing of an manufacturing agreement with rapid diagnostic test manufacturer Biosure Limited late last month. Abingdon is the exclusive manufacturer of the tests at its sites in York and Doncaster following a pilot production run.

Of course Abingdon isn’t the only UK share involved in the manufacture of Covid-19 equipment. In fact competition in this market is intense and threatens to get worse. But as I explained recently, the public health emergency is tipped to run on for the next few years at least, perhaps even indefinitely. So I think this penny stock could still enjoy meaty profits growth in the short-to-medium term at a minimum. Like Renold, I’d happily buy this cheap UK share right now.

Recovery penny stocks

The first is engineering group Renold (LSE: RNO). I should point out this company has a market capitalisation of just £52m, making it a tiny business that might be unsuitable for some investors. However, I am entirely comfortable investing in small enterprises, which is why I’m considering buying. 

The industrial supplier of chains and other power transmission products suffered a decline in demand for its goods last year. For the financial year ending 31 March, revenues and operating profits were £165.3m and £11.2m respectively. That compares to revenues of £187.6m and operating profits of £13.1m for the financial year ending 31 March 2020.

While these new figures are disappointing, the company is already seeing a recovery in demand. CEO Robert Purcell believes the group will return to growth in its current financial year, based on current order book volumes. 

This growth potential is the reason why I’d buy Renold for my portfolio of penny stocks.

That said, while I believe the group has plenty of potential, I am also aware it operates in a fiercely competitive sector. Lower-cost international competitors could undercut the group, which could harm its recovery. This is something I’ll keep an eye on as we advance. 

Booming market

The second company I’d buy for my portfolio of penny stocks isn’t a traditional recovery investment. Airtel Africa (LSE: AAF) provides mobile telecommunication services across its continent, and the firm is currently benefiting from a surge in demand for mobile data. 

The pandemic has changed how many people live and work with the world now relying on technology more than ever before. I think this could drive outperformance in the tech sector for years to come and increase the demand for services such as fibre broadband and mobile data. 

This is why I’d buy Airtel. Even though the company has a market capitalisation of £3bn, it’s still technically a penny stock. 

The company’s earnings are expected to grow 11% this year and 23% in 2023. These numbers imply the group has the growth potential of a small business, but its market capitalisation suggests it has all the experience of a blue-chip stock. 

Despite its potential, Airtel will undoubtedly face challenges in the future. Providing telecommunications services can be costly as it could require billions to maintain equipment. The sector is also competitive, with providers constantly undercutting each other. These are the main risks and challenges the group faces right now. 

Still, I’d buy the company for my portfolio of penny stocks considering its growth potential and 4.3% dividend yield. 

Fresh trading news could impress

Renold (LSE: RNO) is set to release results for the full year to March 2021 this Friday (16 July). I’m expecting some sunny commentary on trading conditions that could help the industrial chain, gear and coupling maker rise in price. It’s already doubled in value over the past year to current levels of 22p.

This company manufactures products that are used across a wide range of applications. They can be found in escalators and mining equipment, fork lift trucks, rollercoasters and waste-water treatment tanks. The AIM-traded share is therefore in great shape to ride the economic recovery, I feel. What’s more, such products require a high level of precision to enable machinery to work properly and efficiently. This is something that Renold, which started making chains back in the 1860s, has a great reputation for.

Latest financials showed improving trading conditions in the final quarter pushed its order book up 3.6% year-on-year as of March. This is a penny stock that has the bit between its teeth. But remember that the company has embarked on an ambitious restructuring plan, problems related to which could weigh heavily on the company’s share price.

One of the best UK tech shares to buy?

The video games market has grown significantly since spring 2020 as coronavirus lockdowns kept people at home. But don’t be fooled into thinking that the industry is simply flavour of the month right now. In truth gaming has been the fastest-growing home entertainment segment for years now. And City analysts are thinking that it will continue to broadly grow in the years ahead.

Gaming analysis firm Newzoo, for instance, thinks that the global market will be worth $204.6bn by 2023. That compares with $177.8bn last year. I myself have invested in software development and marketing services provider Keywords Studios to make money from this bulging industry. And I think tinyBuild (LSE: TBLD) could be another of the best UK shares to buy to play this theme.

tinyBuild is a video games developer and publisher that benefited greatly from new title releases and Covid-19 lockdowns last year. In fact, revenues soared 35% year-on-year in 2020 as the tech titan beat expectations. And the company, which only started trading on the London Stock Exchange in March, has a packed pipeline of 20 titles that it hopes will keep sales blasting higher.

Incidentally, tinyBuild’s multiplayer Secret Neighbor title topped the Apple App Store charts last month following its release on Sony’s PS4 console in April. Competition is tough as developers compete for gamers’ attention. And the business of games development can be a tricky and expensive business (just ask CD Projekt after its botched launch of Cyberpunk 2077 late last year). But I still think this UK share has plenty of investment potential.