As I speculated in March last year, car dealer Lookers (LSE: LOOK) was to enjoy a brilliant 2021. Throw in 2022’s gains so far and it’s now in serious danger of losing its penny stock status. Not that I expect holders will complain.
Penny stock power
Since February 2021, shares in the small-cap have soared over 150%! Contrast this with the 17% and 8% uplift in the FTSE 100 and FTSE 250 respectively and I have more evidence of how minnows have the potential to turbocharge my wealth. This is assuming, of course, I select them carefully. A healthy bit of luck goes a long way too.
Still, the reasons for Lookers incredible returns aren’t hard to fathom. A shortage of semiconductors and a consequent slowdown in manufacturing has accelerated the price of new and second-hand vehicles. This, when combined with the growth in savings as a result of multiple UK lockdowns, was always likely to benefit the £380m-cap company.
With Covid-19 travel restrictions throwing holiday plans into disarray, the rush to buy a new (or nearly new) set of wheels was inevitable in hindsight.
Can this continue?
January’s trading update certainly made for pleasant reading. Trading “remained strong” and “above the Board’s expectations” in the final quarter, thanks to “excellent new and used vehicle margins“. Like-for-like after-sales revenues were also up 7.1% compared to the previous year.
The share price also received another huge boost at the end of last month after Constellation Automotive Holdings snapped up almost 20% of the company. According to chairman Ian Bull, the new investor regards the company as “significantly undervalued“. Then again, you wouldn’t expect them to say anything different. No less than 102p was paid for each share!
Time will tell if this proves to be a good bit of business. Lookers certainly appears cheap at face value. Even with the near-39% drop in earnings per share expected in 2022, the stock still changes hands at a P/E of just nine. A forecast dividend yield of 3.3% is also in the offing to prospective owners.
Based on these attractions, I’m cautiously optimistic this penny stock can continue rising. That said, I don’t doubt they’ll be some profit-taking soon. I also need to remember that margins are wafer-thin and demand will surely moderate as supply chains get back to normal.
Bouncing back in 2022?
Since I highlighted its potential at the same time as Lookers, it’s worth mentioning that I remain optimistic about freight manager Xpediator (LSE: XPD). That’s despite the company’s share price coming back down to earth after motoring during the first half of 2021.
January’s trading update on FY21 didn’t contain any nasties as far as I could see. Revenue “in excess of £300m” is now expected. That’s growth of at least 36%. Adjusted pre-tax profit will also be “well in excess of £8.5m” compared to the £7.2m achieved in 2020.
Looking ahead, a new 200,000 sq ft facility in Southampton is predicted to bring efficiency and capacity benefits this year. Increased business in Europe is also likely as Covid-19 restrictions are lifted.
For balance, it’s worth mentioning that this penny stock’s margins are as thin as those of Lookers. The current P/E of 13 is also fairly high, relative to the industry average, although the shares do come with a well-covered 3.1% dividend yield.
Paul Summers 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.
