Top 20 UK penny stocks for traders

We explain what you need to know about penny stocks and outline the most volatile ones for traders to keep an eye on.

Penny Source: Bloomberg

What is a penny stock?

Penny stocks are small, low-valued businesses that can offer higher risk and reward to investors. They are regarded as a more speculative investment than larger businesses because they are geared for growth and often loss-making, with many yet to generate any income or develop a viable product or service.

The US Securities & Exchange Commission (SEC) has formally defined a US penny stock as one with a share price below $5 per share, having previously been a stock below $1 per share beforehand. Many of these are quoted over-the-counter (OTC) but some also trade on exchanges.

The UK does not have its own formal definition although a penny stock is generally considered to have a share price of below £1, with most confined to AIM.

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Some also like to define a penny stock not just by the value of each share but the entire business. The Halifax defines a UK penny stock as one with a market cap below £100 million while the SEC defines a ‘microcap stock’ as one with less than $300 million.

What are the risks and rewards associated with penny stocks?

A number of well-known companies started off as penny stocks. Those that invested in companies such as Ford Motor Co or JD Sports Fashion in the early stages have been well rewarded, however it is important to stress that many penny stocks ultimately fail and that investing can be highly speculative.

The share prices of penny stocks can be volatile, either as a result of lower liquidity or because it is sensitive to news and market developments. Penny stocks can turn into a huge success or an utter failure overnight: winning or losing one contract or the level of success of a new product, for example, can decide their future. Many penny stocks have no track record and it is not uncommon for them to have no assets, operations or revenue. Products and service offerings are often still in development and yet to be tested in the actual market. This could range from a small pharma stock developing a new drug to a junior miner digging for gold in foreign destinations, both of which are highly risky endeavours but ones that can be transformational if they are successful.

News coverage and analysis of penny stocks is harder to come by compared to gaining insight into larger, more popular stocks, and issues of corruption and fraud tend to be more prominent (although even the largest stocks are exposed to these matters too).

Read more about Singapore's penny stock crash of 2013

It is also worth noting that penny stocks are more likely to raise equity from investors on an ongoing basis as it gives them a way of securing vital funds for growth if traditional lenders refuse to provide debt, or if any available debt is too pricey. Each fundraising dilutes the shareholding of existing investors and devalues the price per share.

What are the best penny stocks to trade?

There is an array of penny stocks operating in a broad range of industries for investors to choose from, including some names that will be well-known to UK investors and consumers. While some penny stocks are small firms chasing growth there are some big names that have subsequently become penny stocks following steep falls in value.

The two tables below outline the UK penny stocks that have reported the biggest gains and losses in their share prices over the last three months. The qualification criteria is solely based on companies having a share price less than £1, regardless of the firm’s market capitalisation.

Learn the top penny stock trading tips

Top 10 UK penny stock gainers

Below is a list of the ten UK penny stocks that have delivered the biggest gains in share price over the three months to the close of trade on 10 April 2019:

Description 3-month price movement Share price Market cap
McColl's Convenience store operator 46% 79.9p £92.1 million
Lonmin Platinum miner operating in S.Africa 44% 72.15p £204.2 million
Ophir Energy Oil and gas exploration and production 27% 57.05p £403.8 million
Petropavlovsk Gold miner operating in Russia 23% 8.34p £227.1 million
Topps Tiles Flooring and tile retailer 23% 79.2p £157.2 million
Foxtons London estate agents 21% 64.15p £177.8 million
ITE Group Trade exhibitions and conferences 19% 74.55p £550.9 million
Pendragon Automotive dealer 19% 26.43p £373.0 million
Reach National and regional news publisher 11% 64.10p £194.5 million
Sirius Real Estate Commercial/industrial property operator 10% 64.75p £654.1 million

McColl’s Retail Group

McColl’s operates around 1550 convenience stores and newsagents in the UK that serve five million customers each week. The company is currently refreshing its store network to pivot its outlets toward growth areas such as food-on-the-go (including installing Subway sites in some stores) and fresh produce. While it is still happy to acquire new stores if they fit the portfolio (it bought nearly 300 stores from the Co-Op in 2017), McColl’s is also continuing to shut-down underperforming stores, particularly its newsagents which have been dramatically reduced over the last five years. It is also in the latter stages of moving suppliers to supermarket Morrisons, which also operates a wholesale division, after its previous one, Palmer & Harvey, entered administration in 2017.

McColl’s has been delivering despite the big changes being made. Revenue in its latest financial year rose to £1.24 billion from £1.15 billion in 2017 and just £950,400 in 2016, although its investments did cause pre-tax profit to drop to £7.9 million last year from £18.4 million. It did nudge its dividend higher though, to 10.3p from 10.2p. Sales have continued to grow in early 2019 and the company has said it expects a 'modest improvement' to adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the current financial year.

Lonmin

Lonmin is a platinum group metal miner operating in South Africa. It returned to profit for the first time in five years in 2018 following years of price pressure, higher wage costs and labour protests. Having scrapped some its deepest shafts, output in 2019 is forecast to be between 640,000-670,000 ounces, lower than the 681,580 ounces delivered last year.

The company is currently recommending a takeover bid from Sibanye-Stillwater, which has been going through lengthy appeal processes since being made in late 2017. Lonmin was forced to refinance itself in the meantime but is still pushing for the merger to be approved.

Ophir Energy

Unlike most small-cap oil and gas stocks that aim to develop projects with the hope of becoming a producer, Ophir differentiates itself by primarily finding and developing new projects and then selling them on at a profit, although it has retained exposure to some production to provide consistent income. After acquiring new producing assets in South East Asia from Santos for $205.00 million Ophir’s production more than doubled in 2018 to push revenue up 58%, although it remained in the red with a vast $719.80 million pre-tax loss.

Ophir is looking to reduce costs in 2019 and lower its exposure to frontier exploration while building out its production base. It has also said it is also establishing distributable reserves that would 'allow the company to return capital to shareholders in the future'.

Petropavlovsk

Petropavlovsk is a gold miner operating three major producing projects in Russia: Pioneer, Albyn, and Malomir as well as the newly-launched Pokrovskiy POX Hub that processes refractory ore. Gold output fell last year to 422,300 ounces but the firm has said it expects production to rise to 450,000 to 500,000 ounces in 2019 as a result of the new POX Hub before targeting 500,000-550,000 ounces of annual output between 2020-2024. The company also holds a 31% interest in Hong-Kong-listed IRC, which is a low-cost producer of iron ore.

Topps Tiles

Topps Tiles is the largest UK tile specialist, with 90% of its flooring either sold exclusively through the firm in the UK or coming from its own in-house brands to give it a competitive edge over rivals. Its focus has traditionally been on supplying retail and wholesale markets but it is making a big push into the commercial tile market through its acquisition of Parkside, which it says has 'doubled the size of the group’s addressable UK market whilst maintaining our specialism in tiles.' Parkside is loss-making and this is expected to be the case in 2019 as it aims to disrupt the existing fragmented market and 'construct a new market leader.'

It delivered something of a turnaround in the last financial year to September 29, 2018. Adjusted revenue grew 1.5% compared to a 1.5% drop the year before, like-for-like (LfL) sales were flat versus a 2.9% decline, its adjusted gross margin nudged slightly higher and net debt was almost halved. Pre-tax profit did decline, however, and its dividend was kept flat at 3.4p. In the 26 weeks since (to the end of March 2019), Topps Tiles reported further improvement in LfL growth of 0.2% year-on-year (YoY) after a big improvement in the second quarter (LfL up 1.8%) relative to the first (down 1.4%).

Foxtons

Foxtons is the number one estate agent for sales and lettings in London, where volumes and values are disproportionately higher than the rest of the UK. Foxtons is one of those companies that has fallen from grace over time, having been worth over £750 million when it listed in 2013. The tough London property market in 2018, exacerbated by uncertainty over Brexit, caused Foxtons to report its first annual loss since listing after the number of transactions were comparable to the 'extremely low levels of 2009… following the financial crash.' That prompted it to scrap its dividend for the year too. Its lettings unit, which is a less volatile business than selling properties, has continued to grow.

Foxtons has said it expects the challenging environment to continue in 2019 but investors seem to have warmed to its strong balance sheet (with no debt) and the long-term fundamentals of London as a prime property hotspot.

ITE Group

ITE Group runs industry conferences and events, including building and interiors exhibition MosBuild, Russia’s biggest travel and tourism event MITT, and the Breakbulk Europe event for the cargo industry. Revenue in the six months to the end of March jumped 42% thanks to the addition of seven events it acquired from peer Ascential and Mining Indaba, a major international mining conference. The company is in its final year of its three-year TAG programme (Transformation & Growth Programme). ITE Group also pays a dividend.

ITE Group has a cautious outlook because of Brexit and macro-economic issues in Turkey but has said forward bookings for 2019 were worth £191 million compared to £137 million a year earlier, with LfL bookings also 6% ahead. Its bookings for 2020 are also nearly one-fifth higher than they were for 2019, providing confidence the company is poised to deliver further growth.

Pendragon

Pendragon is a car dealership that sells new and used cars as well as providing aftercare and leasing services. It is also growing a Software-as-a-Service (SaaS) business named Pinewood that is licensed out to automotive businesses around the world. Revenue from Pinewood rose 7% in 2018 but Pendragon is aiming to deliver 'double-digit' growth going forward.

It has recently appointed a new chief executive after the retirement of Trevor Finn earlier this year. Overall revenue, LfL sales and profit declined last year as the market for new car sales slumped and only partially offset by used car revenue more than doubling. Used car sales have been driven by its new Car Store business, which are outlets that only sell used vehicles. It intends to continue investing more in used car sales and its software business and has said its ongoing sale of its US business should deliver over £100 million before tax. Investors also enjoy dividend payments and share buybacks.

Reach

Reach – formerly known as Trinity Mirror - is a regional and national newspaper publisher with well-known brands such as the Daily Mirror, Daily Express and the Daily Star, as well as magazines such as OK! And New!. The acquisition of Express & Star helped push both revenue and pre-tax profit 16% higher last year, although sales fell on a LfL basis. Its dividend was raised by 6% and Reach has said it is committed to its progressive policy with a view of raising the annual payout by 5% per year.

The sector has found it tough competing in online news and peers such as Johnston Press hit trouble. The company is delivering substantial synergies from Express & Star, which is growing its circulation and number of readers.

Sirius Real Estate

Sirius Real Estate owns and operates business parks, offices and industrial complexes in Germany. It claims to be the leading provider of flexible workspace to the German SME market and offers additional services such as storage.

Sirius posted stellar results for the six months to the end of September 2018, with income, profit and the dividend all heading higher. It also sold-off the last of its non-core operations and bought several new assets, in addition to recently signing an investment joint venture with clients represented by AXA Investment Managers - Real Assets which will look to build upon two business parks initially included in the deal. It has said its results for the full year to the end of March 2019 will be in line with expectations, with the rise in LfL annualised rental income expected to be greater than the 6.2% reported over the same period the year before.

Biggest UK penny stock losers

Below is a list of the ten UK penny stocks that have delivered the biggest losses in share price over the three months to the close of trade on April 10, 2019:

Description 3-month price movement Share price Market cap
Petra Diamonds Diamond miner primarily in S.Africa -62% 16.96p £146.5 million
Xaar Industrial inkjet printheads -41% 95.0p £74.4 million
Low & Bonar Polymer-based material maker -32% 14.28p £100.0 million
Thomas Cook Package holidays and trip operator -32% 22.87p £352.0 million
Carpetright Carpet and flooring retailer -31% 13.78p £41.3 million
Nostrum Oil & Gas Oil and gas exploration in Kazakhstan -26% 87.30p £167.0 million
Countrywide Estate agents -22% 7.34p £121.0 million
AO World Online electronics retailer -21% 99.9p £477.6 million
DP Eurasia Domino's Pizza franchisee in 4 countries -21% 89.1p £128.5 million
Huntsworth Healthcare and communications group -19% 82.5p £288.4 million

Petra Diamonds

Petra Diamonds has four producing mines, three in South Africa and one in Tanzania. The miner has been increasing production and revenue but has seen its profitability slide to keep it firmly in the red, thanks to lower quality stones being recovered from some of its mines combined with lower diamond prices. Its situation is exacerbated by $560 million worth of net debt that needs to be cleared. The firm’s new chief executive officer (CEO) Richard Duffy has said he intends to focus on making Petra a ‘steady-state cash-generative operation.’

Xaar

Xaar is an industrial printing group based in Cambridge and shares have struggled since it issued its second profit warning for 2018 last August. It has since released its annual 2018 results that showed revenue fell by more than one-third and margins tightened, enough so it was pushed to a £15 million pre-tax loss from a £12.3 million profit the year before. That prompted it to slash its dividend from 10p to just 1p.

The company’s long-term strategy is to transform itself from one reliant on selling industrial printheads to a more diversified business with interests in breakthrough areas like 3D printing.

Low & Bonar

Low & Bonar produces advanced, high-performance materials from polymer-based yarns and fibres. Its annual results for the year to the end of November 2018 showed a 3.3% decline in revenue and a much wider pre-tax loss of £42.2 million (vs £19.7 million), which prompted it to slash its dividend by more than half to 1.42p from 3.05p.

Low & Bonar has said revenue has been ‘held back’ since then due to a number of factors, but has warned investors that 2019 will be a ‘year of transition’ as it self-off its Civil Engineering business. The firm has said it expects to see ‘an improving trend in sales and profitability’ during the remainder of the year but says market and macro-economic factors ‘remain uncertain.’

Thomas Cook

Thomas Cook, which sells package holidays and runs its own airline, is one of the more familiar names among UK penny stocks and a company that has hit trouble of late. After issuing two profit warnings the firm posted an annual pre-tax loss of £163 million in 2018 versus the £9 million profit the year before, and net debt has soared to nearly £390 million from just £40 million a year earlier. Being undercut by online rivals (Thomas Cook still has a large high street, bricks-and-mortar presence), Brexit and tough economic conditions have all played their part in dampening appetite for Thomas Cook’s services.

The firm has said it is considering selling off its airline, which has proven more resilient than the rest of the business, and has said it may cut up to 300 jobs and close 21 stores as part of a restructuring aimed at getting the company back on track. Things have improved somewhat, with revenue up 1% in the first quarter (Q1) of 2019, but it remained loss-making and investors will be waiting for updates on the next steps for the struggling business.

Carpetright

Carpetright, the flooring retailer, has been limping into recovery and is struggling to turn things around. It has closed a significant number of stores as part of a restructuring – 65 in the six months to 27 October alone – which has come at a cost and, when combined with weaker trading, resulted in a £11.7 million loss in the period compared to a £600,000 loss the year before. UK sales were down 19% but, in what may be considered a bright spot for the business, LfL sales in Europe managed to grow 0.5%. More store closures are on the way as part of the terms of its financial restructuring completed last year, when it secured reduced rents from its landlords to avoid total collapse.

In the 13 weeks since (to January 26, 2019) LfL sales continued to shrink in the UK but Carpetright says the rate has slowed. Trading in the rest of Europe was tracking ‘consistently ahead of the same period last year,’ driven by a strong performance in the Netherlands.

Nostrum Oil & Gas

Nostrum Oil & Gas is a development and production company focused on assets in Kazakhstan, specifically in the Pre-Caspian basin close to the Russian border. Production in 2018 fell to 31,254 barrels per day from 39,199 barrels daily the year before, partly because of disappointing output from the Biyski North-east reservoir and the western area of Chinarevskoye licence. That pushed revenue down to $390 million from $405.5 million but margins improved thanks to cost-cutting efforts, with EBITDA broadly flat at $231 million. Net debt also breached the $1.0 billion threshold by the end of 2018 after rising from $961 million the year before. Investors also took caution from the 78 million barrel drop in reserves last year.

Nostrum Oil has said it intends to reverse both the decline in output and reserves in 2019. Production in the first three months of 2019 picked up to 32,500 barrels daily but Nostrum has maintained its guidance for 30,000 barrels per day over the year.

Countrywide

Countrywide is one of the largest estate agents in the UK as well as one of the biggest independent mortgage brokers and provider of surveying services. 2018 was a poor year for Countrywide: it was forced to raise £140 million in emergency funds from shareholders after there was a lack of appetite for its proposed high-yield bond issue and, after several warnings, adjusted EBITDA was halved to £32.7 million. Its reported loss for the year swelled to $218.2 million from £207.3 million.

The company has said it is aiming to get ‘back to basics’ by refocusing on its core sales and lettings but has said the weakness in the property market seen in the latter half of 2018 have continued this year, primarily thanks to the uncertainty spawning from Brexit. Countrywide has already warned a further slowdown will knock up to £5 million off its EBITDA in the first half and it has warned its goal of delivering broadly flat EBITDA over the whole year is contingent on some form of recovery in the first half and a stronger second half, both of which are highly uncertain.

AO World

AO World, the online electrical retailer, saw shares start to tumble in January when its CEO Steve Caunce stepped down to be replaced by AO’s founder, John Roberts, who had run the business until early 2017 when Caunce took over.

The company faces several headwinds, including the additional costs arising from stockpiling inventory ahead of Brexit and a loss-making contract in Germany it can’t terminate, but progress is being delivered. Revenue over the 12 months to the end of March 2019 rose by around 13% to £900 million (4% of which came from Mobile Phones Direct that it acquired in late 2017) and while adjusted EBITDA is forecast to be at the lower-end of the consensus range of a £400,000 loss to a £2 million profit – it will be a significant improvement from the £3.4 million loss reported the year before. Roberts has said AO is testing a ‘genuinely disruptive rental proposition’ and that it has expanded into new categories like garden and DIY ahead of the season. It is also racing to launch its AO Mobile digital service in time for peak trading later this year.

DP Eurasia

DP Eurasia is the master franchisee of Domino’s Pizza in Turkey, Russia, Azerbaijan and Georgia. Its results in 2018 were mixed: sales rose 31% and revenue jumped 37% but it swung to an adjusted net loss of ₺6.7 million from a ₺16.9 million profit in 2017, while adjusted net debt jumped 45% following a refinancing of loans from euros into Russian rouble.

While sales have continued to grow at double-digit rates it is the company’s geographies that has investors worried: economic conditions in Turkey – its largest market - are far from ideal at present and LfL sales expectations in Russia – its fastest growing market – have been scaled back. However, it is responding through ‘stricter food and labour cost control’ and improving the efficiency of its logistics.

Huntsworth

Huntsworth is a healthcare and communications group that is geared toward the former. Healthcare accounts for around 85% of total profit and its primary geography is in the US, which accounts for over 70% of profits.

Its 2018 results delivered a 14% jump in revenue to £225 million, a 14% rise in LfL sales and a 26% leap in underlying pre-tax profit to £31 million, allowing the dividend to be raised to 2.3p from 2.0p. However, net debt also increased to £77 million from £36.3 million, pushing gearing up to 1.9x from 1.1x, and in March its new chairman, David Lowden, took over from Derek Mapp.

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