I’m focusing on penny stocks today and the first one I’m looking at is ULS Technology (LSE: ULS). The share price is 72p as I write, but I think this could rise considerably from here.
The company provides software and services in the property, legal and financial industries. Its flagship offering is eConveyancer, which is an online comparison tool for residential conveyancing quotations. It also owns DigitalMove, another online platform that centralises and streamlines the conveyancing process.
It released its half-year report last week that showed revenue growing 48% to £10.2m. The gross margin also improved, reaching 40% and up from 38.8% in the same period one year ago. However, the business remains loss-making. The underlying loss before tax was £1.48m, which increased from £0.64m and does make this penny stock higher-risk.
The firm said this was due to continued investment in eConveyancer and DigitalMove. I think this is the right thing to do as these platforms have the potential to streamline the house-moving process. This is an area that’s ripe for disruption from a technology-led company, in my view.
However, what derisks this penny stock is its net cash position. As I write, the company’s market value is about £50m, but there’s cash totalling £23.1m on the balance sheet. This provides the management team with considerable flexibility to invest in its digital platforms.
There’s never a guarantee of success, of course, particularly if the housing market slows. But with a new CEO coming on board in 2021, and a robust balance sheet, I think ULS Technology could be a much larger business in 2022. It’s a buy for my portfolio.
The next company is Restaurant Group (LSE: RTN) as the share price dipped back under 100p in October. The firm released a strong trading update in November and the shares almost reached 100p again. However, recent market weakness related to the Omicron variant has meant the share price has slipped back to 84p as I write.
Restaurant Group operates around 400 restaurants and pubs, including Frankie & Benny’s, Wagamama, and Chiquito. The trading update back in November said that the company was outperforming its market (defined as the Coffer Peach restaurant and pub benchmark in the trading update). Management then upgraded its guidance for adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to a range of £73m to £79m.
I consider Restaurant Group a recovery play. With this in mind, the company should perform well next year as I believe there’s still a lot of pent-up demand for dining and socialising after lockdowns.
However, this does come with some risk. The company said recently it experienced a minor improvement in UK airport passenger volumes, which increased sales in its concessions business. Any further travel restrictions related to Omicron will likely impact this business division.
Nevertheless, I think this stock should continue to trade well next year as the demand for restaurants and pubs stays high. I’m considering adding the shares to my portfolio.
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Dan Appleby 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.