Penny shares, by their very nature, look temptingly priced. It’s easy to imagine a stock multiplying in value over a short period of time if it can be snapped up for mere pocket change. Even so, I think it pays to be extra cautious when hunting for winners. Here are three companies that, based on traditional investing metrics, look good value to me. But are they really?

Renold 

I can currently buy shares in industrial chain supplier Renold (LSE: RNO) for just nine times earnings. That already looks a potential bargain given that the company’s customers are nicely diversified by sector and geography. However, this minnow also has a PEG (price/earnings-to-growth) ratio of 0.5. As a rule of thumb, anything at or below 1.0 tends to imply value based on that firm’s prospects. 

Recent results go some way to supporting this. Earlier this month, the company announced that it was continuing to see a recovery in revenues and orders following the pandemic. The latter rose 61.3% to almost £80m over the four months to the end of July. As such, RNO now predicts it will beat market expectations for full-year adjusted operating profit. 

This is not to say that an investment in this penny share is risk-free. The “much-lengthened supply chains” and “considerable raw material and transport cost inflation” mentioned in the last update could get worse before they get better. Even so, I reckon Renold is a cautious buy for my portfolio today.

Severfield

Severfield (LSE: SFR) produces about 300,000 tonnes of fabricated steelwork a year from its five UK sites and factory in India. This is eventually used in the construction of landmark buildings, stadiums, warehouses, hospitals and universities. London’s Shard and Wimbledon’s No.1 Court are examples. 

Right now, I can buy the shares for 11 times earnings. That compares favourably to valuations both within its industry and the market as a whole. The company also has a PEG ratio of just under 1.0. 

Then again, it’s worth me bearing in mind that demand for Severfield’s steel will clearly be linked to the overall health of the UK economy. It’s also worth noting that this has been a penny share for over nine years now. As such, I doubt this stock will fly anytime soon.

Still, it does offer a secure and decent dividend yield (3.7%). So, as a way of balancing out my more racy growth plays, Severfield appeals to me. 

Gem Diamonds

Diamond explorer and producer Gem Diamonds (LSE: GEMD) is a final penny share that, using traditional valuation measures, looks dirt cheap. It has a price-to-earnings (P/E) ratio of less than six for the current year. Other things I like are the net cash position and 3.8% dividend yield.

Then again, this low valuation isn’t a complete surprise. After all, any company in the mining sector has the potential to be highly volatile in price due to the cost and difficulty of extracting whatever metal or mineral it’s focused on. This is potentially compounded by where in the world drilling is taking place.

To be fair, GEMD digs in Botswana and Lesotho, which are considered to be generally safe. However, other risks include the growing popularity of synthetic diamonds among younger buyers.

So, while I like some of what I see here, I’m content to leave Gem Diamonds to those with stronger stomachs.

The post These 3 penny shares look dirt cheap. Should I buy? appeared first on The Twelfth Magpie.

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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.

A tech stock with recurring revenue

Craneware (LSE:CRW) is a software-as-a-service (SaaS) business that collaborates with US hospitals and other healthcare providers. Using its platform clients can quickly identify the true underlying costs of treating specific patients. Simultaneously, it also exposes any inefficiencies that once removed, lead to margin improvement.

As a result, hospitals can manage patient billings and expenses more effectively while also further mitigating any compliance risks.

The platform is a modular system that has 17 different solutions. Clients pay to access the modules they need through fixed contracts that typically span three to nine years. Needless to say, that’s quite a financial commitment, so it’s very reassuring to see that contract renewals are on the rise.

The fact that clients are willing to renew a contract for up to nine years indicates that the platform has become an essential tool, granting Craneware substantial pricing power. At least that’s what I think.

The risks of investing in AIM shares can be high

As previously stated, AIM shares are already exposed to a higher risk level than other listed stocks. And Craneware has the additional challenge of navigating one of the most highly regulated industries in the world – the healthcare sector.

The tech stock’s platform is still subject to patient care regulations as it is indirectly involved with health centres’ day-to-day operations. These restrictions do create barriers to entry for rival firms. But there are already other companies that offer similar services. Any breach could have a significant impact on the firm’s reputation that would undermine its strong pricing power and likely lead to client loss.

Another threat comes in the form of cyberattacks. The data being used on Craneware’s platform is especially sensitive (patient files, medical histories, insurance policies). Any breach in security that exposes personal data could also hurt its reputation and could lead to a rapid decline in contract renewals.

A cheap tech stock in hiding

The stock’s P/E ratio today is nearly 50. That’s hardly what I would call cheap. But a closer inspection reveals a different picture.

When a client pays upfront, Craneware doesn’t recognise the revenue in a single chunk. Instead, it is broken up and recorded over the length of the contract. The income statement for 2020 reported that total revenue was $71.5m. But there is an additional $200m that will be earned from existing clients, and new planned subscriptions over the next three years.

Source: Craneware Annual Report 2020 

With a net profit margin of 24%, if we include the additional $200m revenue, that would indicate a total profit for 2020 of $65m. At today’s price, this places the P/E ratio at 9. Now that looks like a cheap tech stock that I’d want in my own portfolio even with the added risk from AIM Shares. Especially since US healthcare spending is expected to reach $6trn by 2027. 

The post AIM shares: 1 ‘cheap’ tech stock I’d buy today appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Zaven Boyrazian does not own shares in Craneware. The Motley Fool UK has recommended Craneware. 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.