Recently, I have been looking for cheap penny shares to add to my portfolio that could produce substantial returns. I think the three companies listed below meet the criteria I am looking for, and would acquire all three considering their potential. 

Penny shares for growth

The first company on my list is N Brown (LSE: BWNG). I am wary of investing in the retail sector in general because of the ongoing shift from physical to online retailing.

However, N Brown is now a pureplay digital retailer. I think this gives the company an edge in the competitive retail landscape, although it is not immune from sector competition. 

After a rough 2020 and 2021, where sales declined more than 20%, analysts expect growth to return in 2022. Based on current growth projections, the stock is selling at a forward price-to-earnings (P/E) multiple of around 6. That looks cheap compared to the industry average, which is around 12 to 14. 

Based on this valuation and the company’s competitive advantage, I think the stock could increase in value over the next few years as growth returns. 

Unfashionable industry

Unfashionable sectors tend to be good places to hunt for discount shares. Smiths News (LSE: SNWS) is a great example.

The newspaper and magazine distributor operates in a slow and steady unfashionable industry, which is nowhere near as exciting as some of the hot sectors of the market like technology. 

Still, the company does provide an essential service, and after the disruption of the pandemic, it looks cheap. While revenues are expected to decline over the next two years, efficiency initiatives will help it improve bottom-line growth, according to City analysts. 

Based on these projections, the stock is selling at a forward P/E multiple of just 4. This makes the company one of the cheapest penny shares on the market. 

That said, I am under no illusion newspaper distribution is a declining business. Profit margins are also razor-thin, leaving no room for error.

These are the biggest challenges the organisation faces. Nevertheless, I do not think it will take much for the market to reevaluate the stock and its potential. This could lead to a substantial increase in the company’s share price. 

Construction sector growth

The final company I am highlighting is tool and equipment hire business HSS (LSE: HSS). There are two reasons why I like this business right now. First, the construction sector in the UK is booming, which could provide a solid tailwind to support the group’s growth in the years ahead. 

At the same time, the company is starting to reap the benefits of a multi-year transformation plan. City analysts believe the firm could report a net profit of £4m for the 2021 financial year, thanks to these twin tail winds. To put this into perspective, over the past six years, the corporation has lost a total of £130m. 

Based on analysts projections, the shares are trading at a 2022 P/E of 6.2.

The most significant danger here is the risk the company could go back to its old ways. If costs rise significantly and the construction market starts to stagnate, losses could return. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Wise (LSE: WISE) shares have been under pressure recently after analysts at Citigroup recommended that its clients sell the shares. 

According to the investment bank, shares in the money transfer business are priced for “excessive long-term growth expectations“.

Their analysis shows that the company would have to achieve a revenue growth rate of 20% per annum for the next eight years to justify its current valuation. As such, the reports suggest that the stock could underperform the rest of the market if it fails to meet these lofty expectations. 

Put simply, it seems as if Citi’s analysts believe the stock is expensive. I am not so sure. Yes, Wise shares might look a bit pricey, but I think it would be a mistake to suggest that the business cannot grow rapidly over the next few years. 

Growth potential

As I have mentioned in the past, Wise has tremendous growth potential. Currently, the company only accounts for a fraction of the global foreign exchange market, and customer numbers are growing every day. 

What’s more, unlike other businesses in the space, the group rewards its customers with lower prices. It continually reduces the amount of money it takes off the top of each transaction as the business grows. This provides better value for consumers and encourages customer loyalty in a highly competitive and commoditised market. 

That being said, Wise shares do appear expensive. Even after recent declines, the stock is trading at a forward price-to-earnings (P/E) multiple of 99.5. The ratio will fall to 76 by 2023, with further earnings growth on the cards. 

This valuation does not leave much room for error. It suggests that the market is expecting a lot from the company. If it fails to meet these lofty group expectations, investors could quickly turn their backs on the enterprise. 

The biggest risk facing it is the threat of competition, I feel. Companies like Western Union and PayPal are larger and far more established. This gives them much more financial firepower to compete with smaller outfits like Wise. 

Still, Wise does have a competitive edge. It is cheaper and more customer-focused. These qualities should help the business fend off threats from larger competitors. They may also help the company outperform the rest of the payments market, supporting its current valuation. 

The outlook for Wise shares

Overall, I think it is worth considering Citi’s opinion of the money transfer business. The stock does look expensive, and the market seems to be expecting a lot from the corporation over the next couple of years. 

Nevertheless, I believe the company has tremendous growth potential, and its unique business model should continue to attract consumers. As such, I am still happy to buy the shares for my portfolio as a long-term growth investment. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Darktrace (LSE: DARK) share price has sunk in recent months, falling from its highs of 950p to its current price of just under 500p. It’s still higher than its April debut price of 330p, and today, the shares have soared around 20% due to news of strong annual revenue growth and a guidance upgrade. So, is it now the perfect opportunity to invest in the shares or are they still too expensive?

What has caused the recent decline?

The company’s share price decline started at the end of October for a few main reasons. Firstly, Peel Hunt issued a broker note stating that, at over 900p, the shares were severely overpriced. It also described Darktrace’s product, which uses artificial intelligence to thwart cyber-attacks, as a “gimmick”. Peel Hunt gave Darktrace a price target of 473p. Of course, this is slightly above the current share price however, implying that after the recent drop, it may have upside potential.

Investors were also spooked by the number of investors who sold shares after the lock-up period (which prevents investors from selling shares until 180 days after the IPO) ended. This included major investors such as Deep Defence, which sold a third of its holdings, and Summit Partners and KKR. Such widespread selling led to investor confidence decreasing further.

As such, since the end of October, the shares have been on a downward spiral. Issues such as inflation and the general sell-off of technology stocks have potentially contributed to this.

What about the future?

So far, much seems negative about Darktrace. But the company is still performing well. In fact, in its full-year 2021, the firm managed to increase revenues over 40% year-on-year to $281m. Adjusted EBITDA also reached nearly $30m, a 233% year-on-year rise. The company is still loss-making however, reporting a net loss of around $150m. This was mainly due to costs associated with the IPO.

Today also saw an announcement that revenue growth is expected to be around 50% for the next financial year, which is extremely positive. Indeed, this is up from previous estimations of around 38%. It would also take revenues up to well over $400m. This is a sign of excellent growth and a clear reason why the Darktrace share price soared around 20% in early morning trading. 

In recent months, the company has also been able to attract more clients. This includes a lucrative deal with an unnamed European automotive giant and another deal with the building and civil engineering company, Sir Robert McAlpine. That firm said that Darktrace’s AI technology stops around 18,000 email attacks each month. This provides evidence that the technology is not just a “gimmick” and is a compelling reason for me to buy the shares.

Can the Darktrace share price continue to rise?

In the past, I’ve always avoided Darktrace due to its lofty valuation. But if it can achieve its forecast revenues for the next financial year, the Darktrace share price will have a forward price-to-sales ratio of under 10. While this is not bargain territory, it is certainly far more reasonable than before. As such, considering the excellent growth prospects of the firm, and the fact that cyber-security is a largely growing industry, I think today’s rise may just be the start of a major recovery. I’m very tempted to buy.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’ve been researching the best stocks to buy now to add to my portfolio or to increase my holdings of, and these are the three most promising I’ve come up with.

A loser from 2021

Two of what I see as the best stocks to buy this year were serious underperformers in 2021. I expect their fortunes to change, however. One is spread-betting company CMC Markets (LSE: CMCX). I still believe the sell-off in the shares has been overdone.

I think the reason why the shares fallen is that the company had a very strong 2020. As a spread-better, the market fall and subsequent volatility that year led to a lot of client trading and more money for CMC Markets.

Now, however, the shares can be picked up cheaply. The P/E is just four. That’s incredibly low and, in my eyes, very tempting.

As a platform-based business, CMC has high margins and returns on capital employed, both attributes of the high-quality businesses I like to invest in long term.

That said, 2021 highlighted the risks of investing in spread-betters like CMC. Earnings can be lumpy and are affected by what’s happening in the stock market. 

But I’m prioritising adding more CMC Markets shares to my own portfolio this year. I’m confident it’s one of the best stocks to buy now – at least for my portfolio and circumstances.

Will Boohoo turn a corner?

The second ‘loser stock’ is fast fashion e-commerce company Boohoo Group (LSE: BOO). Shares in the retailer are down 70% over the last 12 months. It now means they’re below where they were five years ago.

Sentiment has turned against fast fashion broadly as a sector. ASOS shares have fallen heavily at the same time Boohoo’s have. Increased returns, supply chain pressures, more competition and possibly a cost of living crisis have all combined to put pressure on share prices in the sector.   

There are, however, reasons for optimism. Boohoo has expanded its range of brands as high street retailers have gone into administration. Its Brands added include Debenhams, Oasis, Warehouse and Dorothy Perkins. It’s still highly profitable and despite environmental concerns its core customers of young adults, continue to buy from Boohoo. 

I’ll be starting a position in Boohoo in the coming months, maybe even weeks.

One of the other best stocks to buy now

Diageo (LSE: DGE) was identified by one of my colleagues as a top British stock for 2022. I happen to agree and think it’s also one of the best stocks to buy in the UK right now. In no small part that’s because Diageo expects an extra 550m consumers to come of age this decade.

At its Capital Markets Day in November, it laid out new medium-term forecasts. The guidance was for annual organic sales growth of between 5% and 7% for the next three years, compared with 4% to 6% from 2017 to 2019. I think management can exceed these targets and this growth is very achievable, in my eyes. 

The big risk is that the shares aren’t cheap on a P/E of 34. Management needs to grow sales and profits, otherwise the share price could underperform. But I think the risk-reward balance skews firmly towards the latter and so I’m keen to add more Diageo shares to my portfolio.

Andy Ross owns shares in CMC Markets and Diageo. The Motley Fool UK has recommended ASOS, Diageo, and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A real estate investment trust (REIT) is a special type of company that can be listed on the stock market. It’s a business that owns property and pays out the rental income as a dividend to investors like me. It has to comply with some strict rules (such as paying out a minimum of 90% of the property income to shareholders) in order to get the REIT status. Here’s why I think REITs could be a good idea for my portfolio this year.

Acting as a diversifier

The first reason I’m considering investing in a REIT is that it would help to diversify my portfolio. It provides me with a different type of investment alongside other dividend-paying stocks or property-related companies.

For example, consider two cases. The first case is if I own two dividend-paying stocks, both from the same sector. The second is if I own the same amount of stocks. But this time one is a REIT, with the other from a different sector. I’d prefer the second portfolio as it’s better diversified and should offer me a lower risk. 

A REIT also acts as a diversifier even within the property sector. For example, I could invest in the property marketplace Rightmove, or homebuilder Taylor Wimpey. A REIT allows me to get exposure to actual bricks and mortar. In some ways, this is the purest form of investing in property via a listed stock. It strips out company-specific issues, such as tech problems with Rightmove or winning building projects with a homebuilder.

Income potential from REITs

The second reason I think REITs are attractive at the moment is due to their income payouts. Since the primary aim of such a trust is to distribute the rental income from the properties owned, it should always pay out a dividend. It’s still not guaranteed, but the status requirements of becoming a REIT means that it’s unlikely to stop paying income. I can find yields in excess of 4% with REIT’s including Assura and Primary Health Properties.

Given the low interest rates here in the UK, this dividend yield provides a welcome alternative for my spare cash. I don’t envisage interest rates offering me a real return (interest rate minus inflation) for the rest of the year. Therefore, these stocks look like a good option for me to consider.

A Covid-19 recovery play

Finally, I think that REITs make sense when trying to make a play on the economic recovery from the pandemic. Some offer specific exposure to areas like shopping centres (like UK Commercial Property Trust). The yield here really depends on the demand from retailers. If I think that people are going to be out spending, then more retailers will want to lease space. This helps to drive up rental levels, which should help the REIT to pay out more income.

Clearly, this point can also be flipped to a risk. A slower economic recovery in 2022 could mean that rental income for some of these operations actually falls. Another risk is that property prices could deflate this year, with some saying that we’re in a property bubble. These are both valid points that I need to think about before investing. But I still feel more positive than negative about buying in to the sector as a whole.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Primary Health Properties and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

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During the pandemic, markets became increasingly volatile as Covid-19 took its toll on many different industries. As trading activity grew, online trading stocks benefited from greater commissions. Two of these stocks have posted outstanding results. But can this continue and should I buy? Let’s take a look. 

Plus500

There are two online trading stocks that catch my eye when looking at the FTSE 250. The first, Plus500 (LSE: PLUS), is an Israel-based trading company specialising in Contracts for Difference (CFDs). This platform enables trading of CFDs on more than 2,200 underlying assets. It also has a presence in 50 countries. During the pandemic, it registered impressive results. In the year to the end of December 2020, revenue increased by 146%. This was significantly higher than previous results. Furthermore, these numbers far surpassed expectations. This resulted in a dividend yield that year of 7% and a share buyback scheme that targeted $25m worth of shares. With a price-to-earnings (P/E) ratio of 5.8, this stock has significant upside potential and may be considered a value stock. 

Its financial results took a turn for the worse in summer 2021 when the wider market stabilised. The market volatility that had boosted Plus500 had decreased as much of the world was released from pandemic lockdowns. And the share price dropped after it released weaker results

In Q3, the share price fell 12.8% from 1,470p to 1,282p. Yet that fall came in response to revenue dropping by only 2%. Such bearish sentiment after this revenue hiccup leads me to believe that expectations for Plus500 are too high. Nonetheless, I would be concerned with the prospect of lower market volatility in the future, despite my generally positive view of the firm. 

CMC Markets

In a similar vein, CMC Markets (LSE: CMCX) performed well over the course of the pandemic. The UK-based online trading platform specialises in CFDs and spread-betting. Its full-year to March 2021 saw pre-tax profit up 127%. Furthermore, earnings per share (EPS) were up 104%. Like Plus500, CMC Markets benefited from increased market volatility. With a P/E ratio of just 7.9, I’d be forgiven for seeing this stock as a bargain at its current share price.

Yet as markets became more subdued last year, news coming from CMC Markets was less encouraging. In September 2021, the company even issued a profit warning. Its income guidance for 2022 was cut significantly. The company had originally forecast income of £330m. But this was reduced to £280m and reflected the change in market conditions as we began to emerge from the pandemic.

CMC Markets also confirmed in November 2021 that it may split its leveraged and non-leveraged segments. The split would divide its investment platform from the CFDs, the latter usually generating more revenue when market volatility is greater.

Overall, both Plus500 and CMC Markets are strong companies and have performed well in recent times. Yet I will be buying neither for 2022 at current prices because I still think expectations are artificially high due to their past performances during the pandemic. However, I may buy shares in these two businesses if expectations fall, because I would expect the share price to follow suit.  

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Over the last five years, shares in Lloyds Banking Group (LSE: LLOY) have fallen by 22%. By comparison, the FTSE 100 has risen by 1.5%. So Lloyds has underperformed a poorly performing index. Yet the future is more important than the past. Could the Lloyds share price bounce back this year?

Reasons for optimism

It’s expected that because of steeply rising inflation, interest rates will go up this year. The obvious beneficiaries of this are banks. After all, banks make much of their profits from collecting more interest from borrowers than they have to pay depositors. Lloyds as the biggest UK retail bank is particularly well positioned to benefit from more interest on mortgages and other lending. 

The UK government’s desire to avoid more lockdowns, coupled with a potential economic recovery, could well boost company profits. If company managers feel confident, they will be keener to borrow. This would help Lloyds, which has a market share of 19% when it comes to lending to small and mid-sized British businesses.

On top of these potential growth catalysts, the shares are cheap. The forward P/E is only eight, which is about in line with Barclays. The price-to-book value – another measure of value – is only 0.48 – indicating again that Lloyds shares are potentially undervalued. 

There’s also plenty of potential for the dividend to grow. The dividend has restarted from a low base following (fingers crossed) the worst of the pandemic. There’s plenty of scope therefore for future growth, especially if earnings go up.

Lloyds also has a fairly new CEO. That may give it impetus in extending into new areas of business development, something that started under the previous chief executive. For example, it moved into becoming a landlord.

A reduced reliance on retail and commercial banking would probably help Lloyds to grow and help convince investors that earnings will grow over time. Without that growth, many investors, I think, would give the bank’s shares a miss.

The shares could still underperform

It’s not all rosy, of course. Interest rate rises could be very modest if inflation is temporary and could make little difference to Lloyds’ profit and loss account. In such a scenario, the shares would likely underperform in much the same way as they have in recent years. 

A new variant leading to any further lockdowns could hit consumer spending, business confidence and the economy. The effect on investor confidence would likely see banking sector shares suffer. Lloyds would be no exception. Given its reliance on the UK economy, Lloyds could even be particularly hard hit.

I think there are reasons to believe that Lloyds’ extended period of underperformance may come to an end this year. But that being said, there are a lot of UK shares I like even more at the moment, so I’m in no rush to buy Lloyds.

Andy Ross owns no share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The metaverse is a term coined to refer to a virtual reality world. Within the metaverse, a user can do whatever they want. This can apply to gaming, building items, shopping and even education. With it fast gaining traction, I obviously want to look for ways that I can potentially profit. Here’s one top metaverse stock that I don’t think has received enough coverage as part of this trend.

A smart metaverse accessory

The company I’m referring to is Sony (NYSE:SONY). It’s a well-known brand, with a wide range of operations. These go from consumer electronics to music production. The stock is listed in both Tokyo and New York, with the share price up 19% over the past year.

Aside from making money from the areas of the business that have been operating for decades, there’s one area that’s caught my attention recently. This is with the manufacturing of virtual reality (VR) headsets. The original headset is being replaced with the upcoming VR2 model. Some of the details around this show that Sony is serious about creating something special. These include sensory features such as eye-tracking, vibrations and an ultra-high-definition display.

I’m considering buying Sony shares at the moment based on the above. There’s the risk that other companies will make better headsets, or that game developers will make users buy their versions. I also have to be aware of the risk that Sony may decide to focus efforts on other divisions. But as things stand, I think it could be a smart buy.

Jon Smith has no position in any firm mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The metaverse promises to be the future of the digital economy and metaverse stocks are shares in companies likely to benefit from it. Investors are all desperate to get in on the ground floor before these companies explode in value. But how am I supposed to know the shape it will take? I can’t and that’s why I’m investing in the infrastructure underpinning the metaverse.

Cryptocurrency

When I first heard of Bitcoin in 2013, I scoffed at the very notion of cryptocurrency. I thought it would simply be a passing fad. Ten years down the line and I couldn’t have been more wrong. There are still a lot of sceptics out there, but as more and more institutional investors add cryptocurrencies to their portfolios I can’t shake the feeling that it’s here to stay. Because of this, I’m adding Argo Blockchain (LSE: ARB) to my portfolio.

ARB is a crypto-mining service provider which, in simple language, means that it owns and operates the computer servers needed to keep records of blockchain transitions. For its work, Argo is paid in newly minted Bitcoin, which sits today as the most valued cryptocurrency on the market.

The company share price was in decline through 2021 after shooting up more than 700% in December 2020.  It currently trades at 82.25p and is likely to continue falling in the short term as Bitcoin loses value and cryptocurrencies enter a bear market. However, these things always come in cycles and Argo Blockchain will continue to accrue Bitcoin until the next ‘halving event’ in 2024. Once this happens, the number of new Bitcoin minted is halved. This is part of a process written into the cryptocurrency’s code by its creator to control inflation. The supply shock usually triggers a bull market.

The biggest risk here is knowing if Argo blockchain will survive until 2024. Right now, the cost of revenue is uncomfortably high and the company has only been profitable since 2020. If it sells Bitcoin now it should have enough cash to survive through the next bear market, but it’s still something I need to keep in mind.

Metaverse computing power

The metaverse will be nothing without the computing power to keep it running. To this end I’ll be adding Nvidia (NSADAQ: NVDA) to my portfolio as well. Nvidia designs and manufactures several key components that make computing possible, from GPUs to semiconductors and the software that runs on them. Nvidia currently trades for $272, up 100% from this time last year and up over 900% since 2017. I worry that part of this is down to investor overexcitement. The share’s price-to-earnings (P/E) ratio is unnervingly high at 84.11. Normally I wouldn’t feel comfortable with anything over 20, but this statement from Wells Fargo analyst Aaron Rakers has eased my concerns somewhat. “We estimate that the metaverse could equate to a $10bn incremental market opportunity for NVIDIA over the next five years.”

Ordinarily, I’m suspicious of over-optimistic predictions, but there is genuinely no knowing how big the metaverse may end up being. It could fall apart or it could be a whole new world of opportunity. When it comes to tech, the sky’s the limit.

If it turns out to be the latter, I definitely want to be a part of it.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.