Just looking at the FTSE AIM All-Share shows the extent of the damage, with the index dropping by over 36% in the last 12 months. By comparison, the FTSE 100 is only down by around 8% over the same period.

But it’s honestly not all that surprising. The small scale of these enterprises makes them incredibly susceptible to the effects of a potential recession. Even more so for the ones that still reside in the realm of unprofitability, let alone generate a meaningful revenue stream in the first place.

While the painful volatility investors have endured throughout 2022 so far is technically a stock market correction, it certainly feels like a crash. And things may continue to get worse from here. Yet, after all the panic-selling this year, some top-notch companies are trading at dirt-cheap discounts, even in the world of penny stocks.

With that in mind, I’ve spotted one penny stock I believe looks like a bargain for my portfolio as prices continue to tumble.

One of the best penny stocks to buy now?

Recessions are bad news for most businesses. But some sectors have higher levels of immunity to their adverse effects due to sustained demand even when the economy is in the toilet. That certainly seems true for Water Intelligence (LSE:WATR).

The group provides minimally invasive tech-driven leak detection and repair services for commercial and residential properties. Its franchise-driven business model has kept costs low even as it actively expands its network of locations.

Despite this, the stock has collapsed 50% over the last 12 months. However, investors may be left scratching their heads when comparing the share price momentum with the underlying business performance.

Why? Because Water Intelligence seems to be smashing it! Looking at the latest results, revenues have grown by 44% while underlying profitability expanded by 15%. What’s more, with cash flow generation remaining strong, the group has amassed a sizable $21.9m cash war chest in the bank.

Needless to say, double-digit growth paired with strong liquidity is a beautiful sight in today’s market.

Nothing is risk-free

Over the last couple of years, management has begun re-acquiring its top-performing franchise locations to fuel growth. So far, the tactic seems to be working. But it has amassed some goodwill as well as debt in the process.

The goodwill balance now represents a large portion of the firm’s total assets, suggesting the group may be overpaying during these acquisitions. And if these deals fail to live up to performance expectations, it could compromise long-term value for shareholders.

Its debt isn’t too substantial and has the advantage of fixed interest rates until 2027, at 4.9%. However, raising additional capital could prove more expensive, potentially hampering growth in the near term.

Having said that, the long-term potential of this penny stock remains intact, in my eyes. That’s why it’s currently near the top of my watchlist. And may end up becoming a member of my portfolio in my next round of capital injection, especially now that the stock price has fallen by so much.

Leak detection

The name Water Intelligence nearly fooled me into thinking the business produced smart drinking water. In fact, it is a leak detection business with plenty of years in the industry and international operations across the US, Canada, Australia, Spain, and Belgium.

So what’s the current state of play with Water shares? As I write, they trade for 565p. At this time last year, the stock traded for 1,145p. This is a 50% drop over a 12-month period.

The investment case

Let’s look at some bull aspects of Water Intelligence first. To start with, I’m buoyed by its international presence, which should help boost performance and growth. Drilling down into its specific territories, the piping infrastructure in many of these countries, such as the US and Canada, are ageing. This means that the likelihood of leaks is higher, raising demand for effective and efficient leak detection and repair services. This could serve Water Intelligence’s growth well in the coming years.

Moving onto Water’s performance historically and recently, there is a lot to like for me personally. I do understand that past performance is not a guarantee of the future. However, looking back, I can see it has grown revenue and profit for the past four years in a row. Coming up to date, last month it released a half-year report for the period ended 30 June 2022 that made for good reading. Revenue and sales increased by 44% and 12.5% respectively compared to the same period last year. Net cash also boosted its balance sheet as that increased too. From a growth perspective, this will boost initiatives, including the fact it hired more technicians as it looks to grow the business moving forward.

So to the bull case. Water Intelligence is still a relatively small fish in a large pond. Despite its international presence, there are larger, more established, and arguably better-equipped rivals out there that could dominate the market. This could negatively affect the performance and growth aspirations of Water Intelligence.

Furthermore, Water Intelligence is at the mercy of current macroeconomic headwinds. These include soaring inflation, the rising cost of materials, and recent international currency exchange volatility. Rising costs could put pressure on profit margins. For any growth stock, profit plays a key part in growing the business. In addition to this, Water’s international presence opens it up to unfavourable international currency exchange rates that could damage its balance sheet.

A growth stock I will continue to monitor

In conclusion, I have decided to keep Water Intelligence on my watch list for now. Current volatility, as well as falling investor sentiment help me come to my conclusion. There are some positives to note, including growth to date, as well as recent performance. For that reason I will keep a close eye on the wider economy in relation to its performance to see if I should change my stance down the line.

So it’s hardly surprising that many such stocks have been sold off in recent months.

While penny stocks are notorious for their elevated risk, this comes paired with the potential for enormous returns. And despite what some share price movements would suggest, not all firms in this stock market segment are destined to collapse.

In fact, I’ve found two penny stocks that are currently chugging along nicely. So much so that it potentially makes them the best investments for my portfolio in October and beyond.

One of the best penny stocks to buy now?

It’s been a rough year for the Water Intelligence (LSE:WATR) share price. As a reminder, the company is a provider of non-invasive leak detection and repair services to the residential and commercial sectors.

With investor sentiment dropping off a cliff, this penny stock has tumbled by 50% in the last year. Yet this volatility doesn’t appear to be backed by rational thinking. At least, that’s the impression I’m getting when looking at the latest results because revenue and profits continue to grow by 44% and 10% respectively.

Regardless of what the economy is doing, a burst pipe needs to be fixed, pronto. And demand is already ramping up as we approach the winter season. Furthermore, with profits and cash flow firmly in the black, its dependence on external financing seems minimal. Even more so when looking at the $21.9m (£19.4m) pile of cash on its balance sheet.

Obviously, this isn’t a risk-free investment. Its small size does create challenges when competing against its more established rivals. And its international presence opens the door to currently unfavourable foreign currency exchange rates. Yet, given its solid track record, even in the current market climate, these are risks I’m willing to take for my portfolio.

Pick #2

Another penny stock that’s lost a lot of momentum this year is Solid State (LSE:SOLI). This is an electronics component designer and manufacturer serving the commercial, industrial, and military sectors.

Over the last 12 months, the share price has actually climbed by around 9%. Yet since the start of 2022, it’s been on a downward trajectory, falling by over 20%. What happened?

Like many of its peers, the group has been struggling with supply chain disruptions, especially when it comes to semiconductors. With customer order fulfilment slowing, it seems investors are jumping ship on fears that clients will switch to a larger competitor that can deliver faster.

While this is a valid concern, it’s worth pointing out that the order book continues to grow, even from customers who know there will be a delay. In fact, in its 2022 fiscal year ending in March, the order book grew by 75.9%. And even with fulfilment delays, the revenue stream continues to grow 28.2%, with dividends following at 21.9% growth.

From what I can tell, the primary issues surrounding this business are all short-term hurdles. And with the long-term picture still intact, combined with a double-digit discount, I can’t help but feel a buying opportunity has emerged for my portfolio.

What are UK growth stocks?

Growth stocks are shares of companies whose sales and earnings have grown — and look likely to continue — beyond the sector average, the market average, or both.

There are many factors that could set a UK growth stock apart from the pack. It might have a cutting-edge product that puts its competitors in the shade and delivers exceptional revenue growth. A business might also grow profits at breakneck pace thanks to a successful acquisition-based growth strategy.

Growth companies might also operate in an industry or sector that’s growing rapidly. Today this could, for example, apply to a UK stock that builds electric vehicles, provides cloud-based software that help people work remotely, or supplies healthcare services.

A stock could also have strong growth prospects based on where they operate. For instance, a bank that does business in an emerging market like Asia could generate stronger earnings growth than one in Europe. Faster economic and population growth in Asia, along with low financial product penetration, means that company sales could grow far more rapidly here.

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Top growth stocks in the UK

Let’s look at three UK stock market companies whose earnings have been rising strongly in recent years.

Games Workshop Group

Games Workshop Group is a giant in the realm of tabletop gaming. Thanks to popular platforms like Warhammer 40,000, it has built a large and loyal fanbase in its 40-plus years of existence. 

The quality of its miniatures, and the depth of the folklore it’s created around its gaming platforms, gives it a massive edge against its competitors. The business has also been developing its position in overseas markets and spent heavily on its e-commerce operation, too.

Games Workshop is currently exploring ways to boost the royalties it receives from licencing its intellectual property to mass media.

The big-selling Total War: Warhammer III video game launched in early 2022 illustrates the massive potential here. These steps into mass media could also considerably boost sales of Games Workshop’s miniatures, games, and books.

During the four fiscal years to May 2021, Games Workshop grew annual earnings per share at an average of 45%. City analysts expect expansion to have slowed to low single-digit percentages last year, and for the business to record a similar rise this year.

Water Intelligence

Water Intelligence helps to solve the problem of water leaks. Through its sophisticated equipment it detects, finds, and fixes leaks for residential, commercial, and municipal customers.

Preserving water is becoming increasingly important as fears over climate change and water scarcity balloon. So there is an increasing drive towards finding and repairing leaks to help preserve the precious commodity.

Water Intelligence operates in the US, UK, Canada, and Australia. Creaking infrastructure in these places is resulting in increased incidences of water loss and thus growing demand for the company’s services. Climate change is increasing the rate of such events as well by putting even more strain on pipes and other critical infrastructure.

It’s why earnings per share at this UK growth stock have risen at an average rate of 42% during the past five years. City analysts think, too, that earnings will grow an extra 9% in 2022.

Softcat

Softcat provides a broad spectrum of IT services to businesses. Profits here have risen strongly as the digital revolution has taken off. And its market-leading range of solutions has led to partnerships with some of the world’s largest tech companies. Its partners include Microsoft, Lenovo, Cisco, and Apple.

In the five years to July 2021, earnings per share rose at an average of 24% per year. City forecasters predict growth to cool to 9% in fiscal 2022.

This UK growth share offers investors a chance to capitalise on several fast-growing tech trends. For instance, Softcat designs cloud-based infrastructure for businesses and helps them improve their networks. Demand for such services is growing strongly as flexible working practices take off.

The company also provides cyber security solutions that can protect users from the growing threat of electronic attacks.

Are UK growth stocks right for you?

Essentially, a growth-based investment strategy is built around making profits from share price growth. This is quite different from income investing where individuals try to create wealth by receiving dividend payments.

Ideally one should try and invest in UK growth stocks as early in a company’s life as possible. Strong earnings growth feeds into electrifying share price growth, so the earlier you can get in the more you could potentially stand to gain.

This doesn’t mean that the window of opportunity is narrow, however. Some UK growth shares have been generating robust profits increases for many years and would appear in good shape to continue doing so.

Take rental equipment specialist Ashtead Group (LSE: AHT). Prior to the pandemic, the FTSE 100 share grew annual underlying earnings per share at an average of 30% between financial 2015 and 2019. This was thanks to an aggressive acquisition strategy designed to boost market share.

City analysts expect Ashtead’s earnings to keep growing solidly, too, as infrastructure spending in its core US market picks up and the firm remains committed to sales-boosting acquisitions. Profits have been rising again following initial Covid-19 disruption and analysts think earnings per share will rise 14% this fiscal year and 12% next year.

Ashtead shows how a successful UK growth stock has the potential to supercharge one’s returns over the long term. This business provided the biggest return on investment of any Footsie share during the 2010s, rising at a compound annual growth rate (CAGR) of 43% (according to data company Refinitiv).

But investors need to remember that many stocks with bright growth prospects trade on high price-to-earnings (P/E) ratios. And this can be extremely risky to investors.

It’s natural that companies with exceptional potential should command a premium. The problem is that these expensive shares can be sold off heavily when their growth potential begins to wane.

Tech stocks, for example, tend to attract sky-high valuations. And they have been some of the worst-performing stock market constituents in 2022 as the global economy has struggled. 

Expensive US tech stocks Netflix, Meta, and Amazon have been among the most famous casualties this year on signs of slowing growth. In the UK, technology-focused growth stocks like IT services provider dotDigital Group and video game developer Team17 Group have also fallen sharply as earnings have come under the spotlight. Both businesses traded on P/E ratios above 40 times around the start of the year.

Buying UK growth stocks doesn’t always yield instant results. Some firms take time to deliver strong growth (or any at all) at the beginning as they focus on increasing revenues at the expense of profitability. Here you are buying potential rather than tangible rewards. More established growth shares, however, can offer the best of both worlds.

Royston Wild owns shares in Games Workshop Group and Ashtead Group.

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Profits poised to flow

The growing importance of responsible water usage makes Water Intelligence (LSE: WATR) a great UK share for the next decade, I feel. Why? The company is involved in the detection, finding and fixing water leaks for residential, commercial and municipal customers. And boy is business booming. Revenues here rose 38% in the three months to March. I expect demand for its services to keep booming as the climate crisis worsens too.

The rise of responsible investing is turbocharging demand for so-called ethical investments like Water Intelligence shares. According to Close Brothers Asset Management, a hefty 65% of 2,000 investors it surveyed said that they “prioritise responsible investing over a desire to ‘simply maximise’ their financial return”. Rising concerns over the environment bodes well for this UK share, then, a holder of the London Stock Exchange’s ‘Green Economy Mark’.

It’s worth remembering, though, that Water Intelligence carries a hefty valuation at current prices. City analysts expect the firm’s earnings to rise 13% in 2021. And this leaves the company trading on a forward price-to-earnings (P/E) ratio of 59 times. Such a lofty reading could prompt a sharp share price reversal if the company experiences any distress.

A look at Beyond Meat

As I said earlier, I think Beyond Meat is a great ‘green’ share to buy today. A rising focus on animal welfare is one reason why vegan and vegetarian diets are popular. Concerns over the impact of livestock farming on greenhouse gas levels are also driving people away from animal-based foods.

These issues explain why demand for Beyond Meat’s non-meat products is flying. Latest financials showed net revenues at the company soared 11.4% in the three months to March. This may have missed expectations but that sort of growth is still impressive given that its foodservice operations continued to suffer from Covid-19-related pressures. Beyond Meat is spending heavily so that it can play a big part in the meat-free revolution. As it said last week, it has remained “highly focused on investing in and building out production infrastructure in the US, the EU, and China” in recent months.

That’s not to say that Beyond Meat (like any share) doesn’t have its problems. The company has a giant $1.1bn net debt mountain, which could constrain its growth plans. This is particularly high in relation to the foodie’s sales today (net revenues were a shade over $108m in the first quarter). Still, I think this US share’s market-leading position in a fast-growing marketplace makes it an attractive buy right now.

There are thousands of stocks, and it might not be obvious which ones might be good green picks. So I have set out to save you some work. I present here three UK AIM-listed stocks that a sustainable investor might want to take a look at.

Don’t waste water

Wasting water is not environmentally friendly. Water Intelligence (LSE: WATR) helps its customers detect, find, and fix water leaks. At the moment the core business is American Leak Detection (ALD), which serves residential and commercial customers in the US, Canada, and Australia. A UK-based subsidiary, Water Intelligence International (WII), handles local government and utility customers.

Water Intelligence uses proprietary methods and innovative technology to detect leaks non-invasively. It also provides monitoring services for water companies to detect leaks in their customer’s homes. In addition, there is smart meter and sensor reading technology on offer for businesses to improve their water-use performance and costs.

As we have established, sustainable investing rewards green AND financially viable companies. Water Intelligence’s revenues have swelled from $8.84m in 2015 to $32.36m in 2019. Water Intelligence has also increased its net income, which has grown from $0.58m to $1.7m over the same period. Future growth opportunities include leveraging ALD’s regional reputation to sell WII’s services and vice versa. Then there are the calls for business to provide enhanced disclosure of things like water use which could make them increasingly turn to Water Intelligence for help.

Smart sustainable investing

Installing and managing smart electricity meters on behalf of UK suppliers and collecting a service charge is where Smart Metering Systems makes most of its money. Smart meters, by providing customers with real-time data, should help reduce energy consumption. 

SMS has increased its revenues in each of the last five reported years and turned a profit in each of them. In March, SMS announced a partnership with a sustainable infrastructure fund whereby it fronts the capital for carbon reduction (CaRe) assets (like electric vehicle charging points and batteries for storage) and SMS manages them. The move into the energy management business looks promising given the UK’s net-zero by 2050 target. CaRe assets alongside a green electricity grid (and smart meters) will be key to getting there.

Building a sustainable future

Accsys Technologies takes sustainably-grown wood and through a proprietary process boosts the natural acetyl content of the wood. This creates wood that is more stable and durable and at least as good as alternatives that deplete resources or are highly energy-intensive to produce. In 2016 Accsys reported revenues of €52.77m. In 2020 they were €90.91m. The company was making losses from 2016 through 2019. but in 2020 has swung into a profit of €2.24m. Owing to strong demand for its products the company is opening plants around the world. The European manufacturing base is getting a new reactor. I think Accsys could make a welcome addition to a sustainable investing portfolio.