Penny stocks are often seen as high risk investments that can sometimes yield high reward. In Pendragon (LSE:PDG), I believe I have found one pick that could be a great growth opportunity for my portfolio. Here’s why I like it.

Car market booming

Pendragon is the second-largest motor retailer in the UK. It represents 21 different vehicle manufacturers in the automotive retail sector and operates over 160 sites throughout the UK.

The Covid-19 pandemic has had an effect on many industries and the automotive sector is no different. There is a shortage of new cars (more on that later) but the used car market is booming. Furthermore, climate change discussions and mandates for net zero carbon emissions are becoming more prevalent. This has led people to turn towards purchasing cleaner, more environmentally friendly electric vehicles (EV).

Penny stocks are those that trade for less than £1. As I write, the shares in Pendragon are trading for 21p. At this time last year, shares were trading for 12p, which is a 75% increase. I think shares could rise further too.

Why I like Pendragon

Pendragon has a diversified business model and an international presence, which helps it to generate revenue and profit through different channels. It runs new and used car showrooms with different manufacturers as partners in the UK and in the US. These are usually under its Evans Halshaw and Stratsone brands. Next, it runs a wholesale vehicle parts business under the QuickCo banner. In addition, it owns Pinewood Technologies. This arm of the company provides software solutions to the automotive industry. Finally, it also operates a separate fleet and leasing business through its Pendragon Vehicle Management business.

When looking for the best penny stocks I look at recent and past performance. I understand past performance is not a guarantee of the future but I use it as a gauge nevertheless. I can see revenue recorded was above £4bn for three years before the pandemic-affected year of 2020. Coming up to date, a brief Q4 update announced on 1 December saw Pendragon confirm it had upgraded its profit guidance for the full year to 31 December which shows performance is strong.

At current levels, Pendragon looks like a cheap penny stock option for my portfolio. It sports a price-to-earnings ratio of just six, which is cheap for a large, successful firm with an international presence and a diverse offering.

Penny stocks have greater risks

Pendragon could see performance and growth affected by the current shortage of new vehicles being produced. This is directly linked to a shortage of semiconductors which are essential parts of EVs. Furthermore, macroeconomic pressures such as supply chain issues and HGV driver shortages could affect UK operations and performance in its showrooms.

Overall I believe Pendragon could be a good addition to my portfolio at current levels and I would happily add the shares to my portfolio. It has a good track record and recent performance has been strong too. Shares right now look cheap, which means I could see some lucrative returns in the longer term. As with most penny stocks, I am prepared for some potential pain linked to the risks noted earlier.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Pendragon. 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 nature of the stock markets is such that we never know what is coming around the bend. There could be a boom or a bust in the broad stock markets as a result of unexpected occurrences. Or there could be changes to an individual company’s prospects, for better or for worse. The UK stock I am referring to today, is the latter kind. Transport operator Go-Ahead Group (LSE: GOG) has had an awful start to the day. Its share price is down by almost 20% as I write!

Long-drawn out concerns

But its share price troubles are hardly restricted to today. It has also had an awful six months. Its share price has fallen by 54% as I write. I could take into account the fact that a number of stocks have lost at least some of their value gains since the stock market rally that started in November last year. But I still cannot overlook the fact that even over the past year, the stock is down by some 43%. 

And in fact, going by the latest developments related to it, I reckon there could be some more pain in store. The company has just said that it would be unable to release its results in time, which would lead to a suspension in trading in its stock from 4 January 2022. It does hope to release its numbers by the end of the month, which could restart trading.  

What’s going on with the Go-Ahead Group share price?

Disappointing as this situation is, I would be less concerned about this aspect if the underlying trigger was not quite as serious as it is. Its franchise, London & South Eastern Railway Ltd (LSER), failed to inform the Department of Transport about overpayment of some monies. The department has now taken over the delivery of services from this franchise, and LSER’s contract has not been renewed.

As a potential investor in the stock, I think this could have long-term consequences for the company, in terms of reputational damage. It would anyway miss out on some revenues now and its future revenue stream could also be reduced. This only adds to the struggles faced by travel-related companies during the pandemic, which is not exactly over. 

My assessment of the UK stock

I do not think that the stock is a total write-off though. In fact, I quite liked it before this current fiasco. And it is just a matter of chance that I did not end up buying the stock earlier in the year. I do believe that in time, it could find itself in favour again. And I mean the favour of both the authorities from which it gets business and of investors. But for now, I am not holding my breath. I will watch developments pertaining to it, and I think it will be a few months before I know better where the stock is at. I will take an investment decision on it then.

Manika Premsingh 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.

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Following today’s market update, the Rolls-Royce (LSE: RR) share price continued its recent downward trend. However, it still remains one of the most commonly traded shares on the Hargreaves Lansdown platform. It’s not hard to see why. Its competitive advantage is undoubtedly its engineering heritage. But when I am looking at potential companies to invest in, I try to remove emotion from the equation and look objectively at the prospects for the business in the future.

Rolls-Royce operates in an environment where there are significant barriers to new entrants – both in terms of capital and technical capability. After all, assembling engines for the aerospace industry or constructing power systems for industrial markets is not a feat that could be easily replicated by any potential new entrants.

Although Rolls-Royce is a diversified business with significant operations in defence and power systems, the largest chunk of its revenues (41%) comes from the aerospace division, and in particular from its long-term servicing agreements (LTSA). It doesn’t take a genius to work out that the onset of the pandemic has ruthlessly exposed the risks inherent in such a business model.

Why I continue to remain cautious about Rolls-Royce

For the last 18 months, Rolls-Royce has been in survival mode. It has, and continues to, slash costs. Every time it updates the market, the same key themes keep recurring: restoring its battered balance sheet; improving its free cash flow position; disposing non-strategic assets to improve liquidity; and reducing employee headcount. All good you might say. But what I don’t see much evidence of is how Rolls-Royce will know when it has done restructuring.

Today’s update reinforces my belief that Rolls-Royce continues to view engine flying hours (EFH) as part of its core long-term strategy. But what if they are wrong? What if air travel (particularly long-haul) never returns to pre-pandemic levels? Does it continue to dispose of assets from the business in a desperate attempt to transition to a business model that is more reliant on original equipment sales than LTSAs? Will it need to tap investors for further funds or borrow more money?

Even if EFH do recover to pre-pandemic levels, I still see significant risk. In an attempt to survive through the pandemic, it has shed so many assets (both human and physical) that it is impossible for me to judge how much of this fat-stripping exercise has also carved away muscle too.

At some point, Rolls-Royce will need to transition from a business that is restructuring to one that is capable of reconceiving itself, of regenerating its core strategy. In short, of getting different. I see some evidence of this. The ‘Spirit of Innovation’, its all-electric aircraft, on a recent test-run reached a speed of 387mph. In conjunction with other parties, it is also designing small modular reactors in order to provide affordable, scalable and low-carbon power solutions. These reactors could be online as early as 2030s.

However, with the core of its business so inextricably linked to the aviation industry and with so much near-term uncertainty, I still remain to be convinced that it is a business worth investing in. For now, it remains on my watchlist.

Andrew Mackie has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

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Good results continue to roll in. Never mind the Omicron variant, inflationary concerns or even a slow recovery. I think this bodes well for the FTSE 100 index, which has regained its mojo over the last couple of sessions after dipping in the immediate weeks preceding them. I would go so far as to say that some companies might even support it over the long term, like the packaging provider DS Smith (LSE: SMDS).

DS Smith reports robust results

The company reported continued strong results for the half-year ending 31 October. Its revenue increased by 22% from the corresponding six months of 2020 on a constant currency basis, which is robust enough. But the real highlight of its earnings report is the massive 88% rise in its post-tax profits. 

Dividend increase for the FTSE 100 stock

With this big increase in earnings, the company has also upped its dividends. Its interim dividend is up 4.8p , an increase of 20%. As a result, its dividend yield is now at 3.4%, which is just a bit below the FTSE 100 average of 3.5%. I have said earlier that at this point, I am most interested in stocks that have a minimum dividend yield of 4%. This is because UK inflation is forecast to be 4% in 2022. So, I want my real returns to be at least that much, and I certainly do not wish to lose money. 

However, in this case, I am willing to make an exception. The company has grown its dividends quite a bit over time. So, chances are that if I am ready to hold the stock for the long term, the dividend yield on my investments in the stock would eventually look much higher than they do if I were to buy the stock today. My estimates suggest that if I had invested in the stock some 10 years ago, my dividend yield would be 6.3%.

Long-term structural drivers

In my view, this is indeed a stock for me to buy for the long term. The reason is simple. There has been a structural shift in its favour. It services the thriving e-commerce sector, which has received an unexpected boost during the past year. And it is quite likely that this uptrend will continue. For the relatively short term, this assessment is backed by the company’s forecasts as well. It expects “significant improvement in profitability during the second half of this year”. 

Risks to the stock

I do think, however, that there could be some risks to the forecast going by the rise in inflation that has been happening. So far, DS Smith has been able to mitigate the cost challenge by passing on higher prices to end customers, hedging energy costs and entering into long-term agreements with suppliers. And this may well serve the company going forward as well. But still, I think as a potential investor in the stock I want to keep a watch on this particular aspect. 

However, I do believe that this is a good stock for me to buy for the long term. It is on my list of stocks to invest in during 2022, if not before that. 

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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.

At the moment, the FTSE 100 index is trading at 7,340 points. Back in November, the index made new highs for the year by almost breaking above 7,400 points. Yet when I consider the events of the past few weeks, does it really make sense that the market should be trading this high given the news around Omicron and the potential impact?

Weaker currency helps to boost stocks

There are various different points to consider when trying to understand why the FTSE 100 moves the way it does. It’s not just as simple as saying that bad news should make the index fall. For example, I need to consider the impact of factors like the British Pound.

The pound has fallen in value over the past few weeks, recording lows for the year against currencies such as the US Dollar. The FTSE 100 index is weighted heavily towards exporters. Therefore, when the pound depreciates in value, this actually causes the share prices for exporters to rise. This is because exporters receive payments in foreign currency, such as US Dollars. They then have to buy pounds as they will report their UK accounts in that currency. So if the pound has become cheaper in value, this benefits the FTSE 100 stocks.

As a result, even with worries around the new virus variant, a cheaper pound is one factor why the FTSE 100 as a whole is actually doing well.

Fast-moving sentiment

Another point that I need to be aware of is investor sentiment. It’s true that when the news first broke of concerns around Omicron, the FTSE 100 fell sharply. I could argue that the market accurately reflects the current situation, given the information we currently have. 

The stock market is a forward-looking economic indicator. This means that the price should reflect the current view of the world now and in the future. As the FTSE 100 has bounced back from the wobble, it indicates to me that the bulk of investors see the future more positive than negative. If they thought things will get worse, the stock market would be trading lower.

Clearly, this can change quickly and is something I need to keep a close eye on.

Finding value in the FTSE 100 now

Even though the FTSE 100 is back near the highs of the year, I don’t think that the market is overvalued. It’s still several hundred points away from the all-time high registered back in May 2019. This is in contrast to markets in the US that have closed at all-time highs many times in 2021.

So I do see value in investing in good stocks now for the long term. I’m concerned about what lies ahead with restrictions over the winter. However, I can negate some of this risk by investing in defensive stocks. I can also look at different ways to protect my portfolio against a stock market crash.

Ultimately, I feel that the FTSE 100 can offer me good investment options even with the market close to highs.

Jon Smith and The Motley Fool UK have no position in any share 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.

The Rolls-Royce (LSE: RR) share price has been tumbling recently, and over the past month it’s down 15%. This is partially due to the emergence of the Omicron variant, which has put the short-term future of international travel in doubt. Over the past year, the shares are equally down around 5%. As such, currently priced at 124p, is the Rolls-Royce share price heading towards under 100p, or can it make a strong recovery instead?

Trading update

Today, the company delivered a fairly upbeat trading update. This stated that its trading performance was improving, mainly due to the gradual recovery of international flying and resilience in the defence sector. This meant that in the third quarter, there was the return of positive free cash flow. As a result, free cash outflow for the whole of 2021 is expected to be lower than the £2bn that was previously guided.

The restructuring programme is also progressing well and is delivering key cost savings. This means that by the end of 2021, the group is hoping to have removed more than 8,500 roles, which should help with profitability. As such, the target of £1.3bn in savings by the end of 2022 seems very attainable. In fact, it has already delivered savings of more than £1bn for full-year 2021. Therefore, I hope that when the group reports its full-year trading update in February, the picture will be positive.

Nonetheless, despite this upbeat trading update, the Rolls-Royce share price still fell around 4% in the early hours of trading. This was mainly due to the overall gloomy outlook in the travel industry, especially as new restrictions are placed to combat the Omicron variant. With large engine flying hours currently just at 50% of 2019 levels, it’s also clear Rolls-Royce hasn’t made a full recovery. Therefore, short-term headwinds certainly remain. These are factors that could see the Rolls-Royce share price fall into penny stock territory once again.

Other factors

But while the short term looks uncertain, I’m more optimistic on the group’s long-term future. Indeed, it has managed to strengthen its balance sheet through several disposals. This included the sale of ITP Aero for around €1.7bn back in September, and Bergen Engines for approximately €100m. All in all, these disposals, which total around £2bn, will be used to help reduce net debt. This should also ensure that it comes out of the pandemic in a strong position.

Will the Rolls-Royce share price fall below 100p?

Of course, it’s extremely difficult to predict the short-term direction of the Rolls-Royce share price. But the emergence of the Omicron variant does place the aviation industry in significant doubt once again and Rolls-Royce will be heavily affected by this. Therefore, I wouldn’t be surprised if it crashed below 100p over the next few months.

Despite this, as a long-term investor, I’m still tempted by the Rolls-Royce share price. The firm has navigated the pandemic well and I feel it will come out in a strong position. Therefore, despite the risks facing the company, I’m tempted to buy, especially if it falls into penny stock territory.

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.

Shares in online bathroom retailer Victorian Plumbing (LSE: VIC) sunk 40% this morning after the company warned of “subdued” market conditions and higher costs. The share price has now fallen by 70% since its IPO in June.

However, I’ve gained a good impression of this business since its listing. Sales rose by nearly 30% during the year to 30 September and the group is generating plenty of profit. I reckon today’s share price crash might have left Victorian shares trading at bargain levels.

Good and bad news

Today’s warning came alongside a strong set of results. Victorian Plumbing’s sales rose 29% to £269m last year, while underlying pre-tax profit rose 23% to £29.1m. Customer numbers rose by 13% to 638,000 during the year, as the business benefited from the lockdown DIY boom.

That was the good news. The bad news is that things are expected to be tougher this year.

Sales since October are said to be “broadly the same as last year”, with shoppers spending more on leisure and less on home improvements. That’s no real surprise, in my view. But it does mean it will be harder for Victorian to hit growth forecasts for this year.

To try and solve this problem, it looks like the company is planning to absorb higher product and labour costs in order to keep its prices down. Founder and CEO Mark Radcliffe hopes this will enable the firm to expand its market share and generate further sales growth.

Will profits keep rising?

Based on the numbers provided today, my sums suggest that Victorian Plumbing’s profits may be flat this year. Depending on how market conditions change, I think we could even see a drop in earnings.

However, I think the longer-term growth opportunities are still attractive. The brand appears to be popular with customers, with an Excellent rating on Trustpilot, with over 142,000 reviews.

Sales have doubled since 2018 and the group’s operating profit margin of 10% is higher than either Topps Tiles or B&Q-owner Kingfisher.

Radcliffe is targeting continued growth by adding new products, such as tiles and lighting, and by offering a dedicated service to trade buyers. This all sounds sensible to me.

Victorian Plumbing share price: too cheap?

I normally avoid recent IPO stocks that have crashed. But I can see a lot to like about Victorian Plumbing.

The group has no debt and is still led by its founder, who has a 45% stake in the business. Although he pocketed an eye-watering £212m in June’s IPO, I reckon he should still be motivated by his large shareholding.

I thought the shares were too expensive when they floated in June but, right now, they’re starting to look cheap to me. After today’s slump, I estimate VIC could be trading on around 12 times 2022 forecast earnings. For a growing online business with no debt and proven management, I think that’s attractive.

The main risk I can see is that the slowdown in sales will be worse than expected. Last year’s DIY boom was unusual, after all. We don’t know what will happen next year.

For this reason, I plan to wait for the company’s next trading update before deciding whether to buy. But I’m definitely tempted. I think this business is worth watching.

Roland Head 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.