An award-winning penny stock

If there was a naughty and nice list for stocks over the past year, Zephyr Energy (LSE: ZPHR) would be right at the top of that nice list. At this time last year, a share in this company was trading at 0.82p. Today it is worth 6.85p – representing an award-winning 755% appreciation in share price. Not bad for a penny stock. The winner of the Best Performing Share Award at the prestigious AIM Awards this year is a growing oil company with operations in the US Rocky Mountains. The longer-term risk for Zephyr is the obvious push to phase out fossil fuels, but for the moment, demand remains high. The combination of high demand, recent successes in drilling activities, a very competent and experienced management team, and the 6p price tag on this stock make it a no-brainer for me.

A potential dark horse going into 2022

Travel and lifestyle bookings company Ten Lifestyle Group (LSE: TENG) is next on my list. In the wake of the Covid-19 pandemic, the company has naturally taken quite the beating. Losses have been the order of the day over the past two years but the stock price is yet to reflect this. In fact, this penny stock is up 16% year to date. Now, am I expecting this stock to make me wealthy? Certainly not. But what I’m willing to gamble on is a return to some semblance of normalcy in 2022. Already in September of this year, the company announced that bookings were back to pre-pandemic levels. Provided restrictions continue to get lifted, there could be nice returns here in 2022.

Cheap tech 

Idox (LSE: IDOX) is probably my favourite addition to this list. You simply don’t get tech companies that cost 69p. My colleague James Reynolds, recently wrote about how this penny stock rose roughly 20% in the past year. Idox sells software solutions, mainly to governments but also in the private sector. With a growing base of recurring and non-recurring customers, Idox is likely to continue on its upward trajectory in the future. What I would like to see from Idox in the coming year is growth of its markets at home and abroad. Right now Idox has some presence in Egypt, the Bahamas, and Saudi Arabia. Razer thin margins threaten to impair the growth outlook of the business, but if it can continue to grow in 2022, the sky is the limit for the price of this stock.

That is true but the trick is to know what you are looking for and seek stocks with the potential to grow and the Alternative Investment Market (AIM) could be the place to find them. Often compared to the Wild West, The London Stock Exchange’s junior market for growth companies, is not the place to buy without due diligence.

Its risks are real. Less than a quarter of the original companies listed there are still trading. However, if you examine company fundamentals, debt, profit and management, among some cowboys, you may find yourself a cash cow.

High altitude

Altitude Group (LSE:ALT) provides technology solutions to the  promotional merchandise, marketing and print industries in the UK/North America.

The share price has mostly been on an upward trajectory this year. However, in May, it posted a pre-tax loss of £2.8m compared with a £125k profit the year before. It put 2018 losses down to increased operating costs in the US. But it has a low debt ratio of 0.25 and a strategic acquisition may be just what the company needs to propel its earnings.

Altitude purchased the Advertising Industry Mastermind Group in January for a total consideration of $5m. The purchase was part-funded by a January share placing that raised £9m (gross) and after acquisition, the subsidiary’s trading name changed to AIM Smarter. 

The buy gave Altitude access to approximately 8% of the promotional products sector in its lucrative $23bn US market.

In the first 4.5 months of 2019, over 400 members contributed sales orders worth over $31m. This increased the average from $1m per week in March to over $2m per week in April (2018 averaged $383k per week) and AIM Smarter membership numbers grew by an additional 10%.

Last week, Altitude founder Martin Valery sold £2m shares but continues to retain 14.8% of the company. This understandably caused the share price to fall.

I am still inclined to see this share favourably because the company has confirmed 51 members upgraded to one of its new tiered packages between April and May and it has negotiated fees on sales placed with 149 affiliate suppliers.

Analysts forecast sales rising from £6.6m in 2018 to £19.8m this year and to £35.2m in 2020. But this is all purely speculative until Altitude confirms the revenues it’s receiving, so I see it as one for the watch list. 

Wealth begets wealth

The Ten Lifestyle Group (LSE:TENG) share price has been steadily rising this year.

Ten sells worldwide concierge services to banks and wealthy individuals. Members use its platform to pre-book or purchase items such as restaurant reservations, holidays, tickets or treatments.

In May and June it secured new contracts with Revolut, China Merchants Bank and a global technology, media and telecom brand. The company expects these contracts to grow to be worth more than £2m each in the coming years.

Ten is not currently profitable and its share price is way off previous highs. Plus it has a book value worth only 23% of its current share price. Shareholders who purchased shares 18 months ago will still be nursing losses. Red flags? Maybe, but it has little debt, with a ratio of 0.27 and recent contract wins make me think this company has room for continued share price growth. Again, I am putting it on my watch list.

Last year was the company’s first as a public business. Unfortunately, since coming to the market the group’s performance has been dismal. After jumping to a high of around 160p, the shares have since slumped to just 90p.

So what’s gone wrong? Well, it seems to me that the company has failed to live up to the market’s growth expectations. Figures for the six months to the end of February disappointed, with the firm reporting a loss before interest and tax of £3.8m, against the prior year’s performance of -£0.3m. Revenues increased 5% to £18.2m.

However, it seems to me as if the market is overlooking the firm’s potential. 

Growth mode 

Ten is still in growth mode and the IPO has allowed it to accelerate expansion plans. These efforts seem to be paying off with HSBC and Visa both signing up as clients in the first half.

I believe that if the company can prove to investors that it’s heading in the right direction with its full-year numbers, the shares could stage a dramatic recovery. The good news is the firm looks on track to report a robust set of figures for the current financial year. Today, management announced that it expects net revenues for the fiscal year to be in line with market expectations. 

What does the City think? Well, analysts are forecasting revenue growth of just 5.7% for 2018, which is hardly show-stopping. But in 2019, Ten’s growth efforts are expected to pay off. Analysts believe this is the year the company will finally report a net profit (only £400,000, but that’s a start). 

With a high fixed cost base, I believe Ten’s growth should accelerate once the enterprise reaches its breakeven point. And with demand for custom experiences only growing, it’s my view that this company has what it takes to outperform in the years ahead.

Bigger fish 

If Ten is too small for your portfolio, I’m equally positive on the outlook for Tui (LSE: TUI).

Tui is the biggest fish in the travel business pond. The company’s market capitalisation is more than 100 times the size of Ten. It still offers value though as the shares today are changing hands for just 12.2 times forward earnings. In my opinion, this multiple isn’t too demanding for one of the world’s largest integrated travel businesses. On top of the attractive valuation, the stock also supports a dividend yield of 4.9%, which is covered 1.7 times by earnings per share.

As my Foolish colleague Royston Wild recently noted, shares in Tui have come under pressure since its Q3 results, when it announced a decline in profits. However, like Royston, I believe this selling is overdone as, in the long-term, Tui is well positioned to profit from the ever-growing demand for package holidays and holiday experiences. As Royston pointed out, Tui’s bookings for summer 2018 are up 4% year-on-year, a positive performance and one that I believe showcases the group’s strengths, as opposed to profits, which can be volatile.

However, there are still a number of shares which appear to offer appealing rewards given their level of risk. With that in mind, here’s one dividend share I’d buy, as well as one declining stock that could be a company to avoid at the present time.

Improving outlook

While the retail sector has experienced a difficult recent past, its prospects seem to be improving. B&Q owner Kingfisher (LSE: KGF) could enjoy a strong return to growth after a mixed period, with the company’s bottom line forecast to rise by 17%-18% per annum over the next two financial years.

One reason for this is the improving outlook for the UK economy. Specifically, UK consumers are expected to see their disposable incomes rise in real terms, since inflation has now fallen below wage growth for the first time in over a year. This could lead to improving consumer confidence and may mean that spending on non-essential items increases at a fast pace.

Of course, Kingfisher is an internationally-diversified business. The UK, though, continues to make up a sizeable proportion of its revenue, while the chance of improving operational performance elsewhere under its current strategy could lead to stronger overall profitability.

A rising bottom line means that dividend growth could be brisk. Kingfisher is expected to post a rise in dividends per share of 23% during the next two years. This puts it on a forward yield of 4.3% and suggests that it may offer strong income prospects for the long term.

Disappointing performance

In contrast, the risk/reward ratio for technology-enabled lifestyle and travel platform company Ten Lifestyle (LSE: TENG) appears to be less attractive. It reported a disappointing trading update on Monday, with it stating that net revenue for the 2018 and 2019 financial years is now forecast to be £6m and £10m below previous expectations.

This is due to the length of time between a contract tender, win and commencement of revenue being longer than anticipated. The impact of this on the company’s EBITA (earnings before interest, tax and amortisation) is due to be negative, with its profitability now expected to be below expectations in 2018 and 2019.

While Ten Lifestyle is making progress with operational improvements and has been able to win new contracts of late, its shares have fallen by over 25% on the profit warning. As such, its stock price could be highly volatile over the medium term. Coupled with its lower-than-expected revenue and profit outlook, it appears to be a stock to avoid at the present time.