5 penny stocks I would buy for 2022 and beyond

Some of my biggest investing wins have come from small businesses. That’s why I like to keep an eye out for penny stocks that I think are undervalued by the market.

I searched for potential bargains and found five stocks I’d like to add to my portfolio in 2022.

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I think all of these unloved stocks have good value and could generate big gains over time. But there are no guarantees. Sometimes there’s a good reason why a stock is cheap. Problems can be hidden in the background. The business may lose key customers.

Stock prices of smaller companies also tend to be more volatile than larger stocks. Losses (and gains) can be very sudden. For these reasons, I would never invest in penny stocks with money I couldn’t afford to lose.

I think this share could double

My first choice is a company that I have followed for a few years. I think it might be time to buy. Gulf Maritime Services (LSE:GMS) has a fleet of offshore drilling rigs leased to customers in the Middle East and elsewhere.

Gulf Marine’s fleet is very modern, but this posed a problem. The company had financed its fleet expansion with debt. In 2016, net debt exceeded $400 million, but the 2015 oil crash caused demand for rental rigs to plummet.

However, the company is under new management, reporting steady contract wins and better fleet utilization. Importantly, the debt has started to decline.

Gulf Marine shares are currently trading at just 3.5 times expected 2022 earnings. This reflects the company’s high level of debt. But if debt continues to fall, I think equities should reprice to a more normal valuation.

This is still a risky situation. Debt is still very high and the current surge in high oil prices may not last. But if trading remains good, I think Gulf Marine’s share price could rise sharply from current levels.

Can this quality business continue to grow?

My next pick is quite different. Currency specialist Registration (LSE: REC) provides services to clients who need to manage their exposure to currency risk. It is a very profitable activity, with an operating margin of around 30%.

The problem is that growth has been quite weak in recent years. Between 2017 and 2020, profits remained broadly stable.

New managing director Leslie Hill has brought new ideas and seems to have revived the group’s growth. Revenue rose 38% to £16.3m in the six months to September 30, while pre-tax profit doubled to £5.2m.

I don’t expect this rate of improvement to continue, but broker forecasts suggest Record’s earnings could increase 20% in 2022. In the meantime, the group’s balance sheet looks strong to me, and the stock shows a generous 6% predicted dividend yield.

Record seems to me good value for money at current levels. I would consider buying this penny stock for income and growth.

Still going strong after 157 years

Investing in old companies is no guarantee of success. But, in my experience, companies that have been in operation for over 100 years often have attractive qualities. renold (LSE: RNO) is one such company. This company specializes in industrial chains and gearboxes – a technology that it develops and perfects since 1864.

Growth has not always been linear. Major mining and construction customers experience cyclical downturns from time to time. The demand for certain products has changed over the years. I suspect the shift to electricity and renewables will create new challenges.

Renold’s revenues and profits have plummeted over the past two years, in part due to the pandemic. However, half-year figures for the six months to September 30 suggest that activity has returned to growth. Revenue for the period increased by 17% and adjusted operating profit by 41%.

Broker forecasts suggest this growth is likely to continue into 2022/23. With Renold shares trading at only eight times expected earnings, I would be happy to buy the shares for my portfolio.

A special situation with a yield of 6%

Distributor of newspapers and magazines News from the blacksmiths (LSE: SNWS) is in a special situation. The company’s valuation reflects this – shares currently trade at just four times expected 2022 earnings and offer a dividend yield of 6.3%.

If it was a healthy and growing company, I would probably expect a P/E of 8-10 and a return of 3-4%. The problem is that print newspaper and magazine sales are in long-term decline. These days, this stuff is posted online.

However, Smiths News holds 55% of the remaining market. This makes it large enough to be profitable and generate cash.

The company says it already has plans to cut costs to deal with lower volumes. Brokers who cover the stock have bought into the story. They expect earnings to rise 3% next year, valuing the stock at 3.9 times expected earnings. Another big dividend is expected, indicating a potential yield of 6.3%.

The main risk I see is that the business will continue to shrink unless management finds new markets for Smiths’ distribution services. At some point, which is difficult to predict, this withdrawal could begin to threaten the viability of the business.

I think there’s probably an opportunity here. For this reason, I would be happy to open a small post in Smiths News today.

A penny stock reversal?

Home lender Morse Club (LSE: MCL) is growing steadily in lending and online banking. The company focuses on customers with poor credit ratings, offering loans and prepaid debit cards.

The pandemic has caused a sharp drop in revenue and profits, but Morses now appears to be on the road to recovery. The group’s loan portfolio increased by 8.5% to £60.3m in the six months to August 28, while pre-tax profit for the period rose from £2.3m sterling to £2.6 million.

This company will face ongoing regulatory risks, in my view, as I expect the rules on bad credit loans to continue to tighten. The impact of this could be that Morses’ profitability will be weaker in the future.

Even so, Morses Club has a successful track record in this industry and a significant market share. Earnings are expected to rebound in 2022/23, leaving stocks at just six times expected earnings. At this level, I see this penny stock as a potential buy.

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