The early April deadline by which time stock investors must use this years ISA allowance is drawing close. I’ve been looking for some cheap UK shares to buy before the cut-off date. And I’ve come across some top-quality penny stocks I think could soar in value during the new bull market.
Penny stocks are those that cost investors less than £1 to buy. Their cheapness means their prices can be very volatile. But this potential choppiness means they can also be overlooked by the market. Here are two I think might thrive during the eventual economic recovery.
A cheap UK retail share
A return to economic normality automatically feeds through to improved shopping budgets and consumer confidence. It’s a mix that will likely see demand for N Brown Group’s (LSE: BWNG) products stride higher. This penny stock services the plus-size and older fashion segments through its JD Williams, Jacamo and Simply Be brands.
Research from Scottish Friendly and the Centre for Economics and Business Research suggests that shopper spending could soar sooner rather than later. It estimates that Britons have saved almost £200bn since Covid-19 lockdowns began. And the report reckons they plan to splurge a quarter of this amount as restrictions unravel during the rest of 2021.
I also think N Brown’s huge investment in e-commerce in recent years should drive profits over the next few years as online shopping adoption rates click through the gears. Bear in mind though, that this UK clothing share operates in a highly competitive environment. And this threatens to keep its wafer-thin margins under persistent pressure.
This penny stock’s shares trade at 70p today. This leaves N Brown trading on a price-to-earnings (P/E) ratio of just 9 times, making it an attractive value pick in my book. Remember though, that City predictions of a 2% earnings rise this fiscal year could miss the mark if the economic recovery splutters or if the company gets its product wrong.
Another cheap penny stock
Pendragon (LSE: PDG) is another penny stock I think could perform strongly during the new bull market. As I say, spending habits tend to bounce strongly during the early stages of economic recoveries. And demand for automobiles tends to be particularly electrifying during such periods. This UK share trades at 18p each.
Things might not be all sunny for Pendragon in the medium term though, as environmental legislation concerning petrol and diesel engines might damage demand for its cars. Sales of its petrol, diesel and hybrid motors could suffer if customers worry about declines in the residual value of these big-ticket items. Other issues like rising car taxes on heavily-polluting vehicles, along with falling car use on rising awareness of green issues might also seriously damage revenues.
City analysts think Pendragon’s annual earnings will rebound more than 800% in 2021. And at current prices, it means that this penny stock trades on a P/E ratio of just 11 times. A reading around or below 10 times suggests that a share could be undervalued by the market.
Royston Wild has no…