With this in mind, here are what I believe to be three of the best penny stocks to buy now.

Growth-focused penny stock

Trading at just under a pound, as I type, is Record (LSE: REC). This is a business that tries to reduce the impact of currency movements on institutional clients’ investment portfolios. 

Unfortunately, Record’s recent move to invest for growth has been at the expense of a “short-term decrease in profitability.” However, the firm is still cash-generative and boasts a healthy balance sheet. The payment of a special dividend smacks of confidence too. 

Speaking of which, Record started its new financial year in April with its highest recorded Assets Under Management Equivalents (AUME). It’s also been developing new products, including the recently-launched Emerging Market Sustainable Finance Fund.

Aside from this, Record also scores well on the quality metrics, such as returns on capital and margins. These are high, relative to the market in general, and go some way to making up for industry risks, such as regulatory hurdles. Nevertheless, the latter still has the potential to knock the share price.

On a P/E of a little less than 20 for FY22, I think Record could be a good stock for me to buy now. 

Recovering well

Also featuring in my selection of the best penny stocks to buy now is retailer Topps Tiles (LSE: TPT). Unsurprisingly, this is a company that really suffered at the hands of the pandemic. However, the tide has clearly turned.

Last month’s update said the company’s retail business had “performed well” in Q3, helped by the reopening of stores in April. Topps went on to say it expected to benefit from “high levels of consumer demand” going forward as the home improvement boom continues. A return to sales growth at its Commercial business is also expected.

Of course, hindsight shows that March 2020 was the time to pile in. The shares have multi-bagged since then. However, a P/E of under 15 now still doesn’t feel unreasonable for a debt-free company with an encouraging outlook. That said, its cyclical nature coupled with warnings that Covid-19 could get worse before it gets better makes this a cautious rather than automatic buy.

Ahead of expectations

A final pick is EKF Diagnostics (LSE: EKF). For under a pound a share, I can buy inmto a company that achieved record sales and profits in 2020.

According to May’s AGM statement, this form has carried on into 2021, thanks to “a very meaningful recovery in trading.” EKF’s core business “performed more strongly than expected” in Q1, again thanks to ongoing demand for sample collection devices generated by the pandemic. Indeed, the company now believes that full-year numbers are likely to be “comfortably ahead of already upgraded management expectations.” 

Naturally, all this hasn’t gone unnoticed by the market. In the last year, EKF’s stock jumped by 72% in value and now trades on a forecast P/E of 28. Unfortunately, this high valuation could mean the share price falls heavily if the company disappoints.

With a solid growth strategy and balance sheet, however, I’d still buy EKF today.

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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.

It doesn’t bother me the FTSE 250 retailer carries a forward P/E multiple in and around the bargain-basement level of 10 times. Nor am I shaken by its market-beating corresponding dividend yields of 5.5%. The sharp downturn in the UK retail sector in 2019, one which has driven Topps Tiles’s share price 20% lower over the past 10 weeks alone, is of far more concern to me right now.

It’s not as if the home improvements giant wasn’t already on the ropes ahead of the further deterioration in the UK retail sector in the spring, one which suggests shops are experiencing the worst conditions for more than 30 years.

Last month, Topps Tiles announced like-for-like sales had slowed even further in the six months to March, to a paltry 0.2% from the 0.6% rise printed in the same period a year earlier. And I fully expect another set of chilly numbers when those third-quarter numbers are unveiled.

Stop talking

I’m also content to shun TalkTalk Telecom Group (LSE: TALK) in the run-up to first-quarter financials being unpacked on Wednesday, 17 July.

It’s full-year results of a month ago certainly gave plenty to worry about, the company just clinging onto the downwardly-revised EBITDA target which it issued as recently as February for the 12 months to March. And this was achieved in large part through regulatory cuts to what it has to pay Openreach for fibre and a commercial discount deal it has with BT’s infrastructure division too.

Intense competition continues to play havoc in spite of TalkTalk’s efforts to grab share by introducing its ‘Fixed Low Price Plans’ for new and existing customers. That aforementioned release showed its customer base rose by just 2,000 in the final three months of fiscal 2019, versus 44,000 in the prior quarter.

TalkTalk trades right now on a forward P/E ratio of 16.2 times, not cheap for a share with such a troubling profits outlook, in my opinion. In fact, this rating really leaves the telecoms titan in danger of a share price correction should its client base indeed continues to collapse in quarter one.

Out of juice

The final share I think should be avoided in July is SSE (LSE: SSE), one which is set to release its own first quarter numbers on Thursday, 18 July.

We all know how the ‘Big Six’ electricity suppliers are losing customers at a jaw-dropping pace, with SSE haemorrhaging more than half a million accounts in the last fiscal year alone. Things are likely to have remained difficult since the period’s end too, reflecting the toughening economic conditions here in the UK.

In fact, as the pressures created by the Brexit saga propels more and more homes into the arms of independent, promotion-led operators, I’m expecting newsflow from the likes of SSE to continue worsening as 2019 progresses, and probably beyond too.

So you can keep its low rating (illustrated by a forward P/E ratio of 9.2 times) and its big 7.4% prospective dividend yield. I’ll be happy to go share shopping elsewhere next month.

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This performance is particularly disappointing for management because Topps has been pursuing a digital-first restructuring strategy, which was supposed to improve customer satisfaction and efficiency.

Turnaround process

Figures from the trading update today suggest the reorganisation has not yielded immediate results, although we’ll have to wait for more detailed numbers to assess whether or not the restructuring has helped improve margins and free cash flow.

Ultimately, margin figures will determine how the company performs in fiscal 2019. Analysts have pencilled in earnings per share growth (EPS) 27.3%, after a decline of 27% last year. Falling sales tell me the business might struggle to meet this target, although cost-saving initiatives could help mitigate some of the declines. 

In the meantime, the stock supports a dividend yield of 5.4%, which appears safe for the time being. Indeed, looking at historical numbers, the total dividend is costing the company around £7m, compared to analysed free cash flow of £18m. Looking at these numbers, I wouldn’t recommend buying shares in Topps, but I’m not a seller either.

Impressive track record 

One company I’m much more bullish on is Ashtead Group (LSE: AHT). Over the past 10 years, this business has grown from a small UK enterprise to a global construction equipment rental group. Revenues have risen three-fold in the last six years alone, and net profit has jumped 600% over the same timeframe.

However, shares in the FTSE 100 growth giant have recently come off the boil, falling by around one third in a few months. One of the reasons why the shares have taken such a hammering is because CEO Geoff Drabble announced at the beginning of December that he is going to step down in May, after 12 years at the helm. Drabble presided over the transformation of Ashtead into a global giant, and many investors will be sad to see him go.

His successor, who currently manages the group’s North American division, will have a lot to live up to. But as long as the firm continues to follow Drabble’s lead of growth through sensible acquisitions and industry consolidation, it should be business as usual.

With this being the case, I think now is the perfect time to buy shares in Ashtead. Following recent declines, the shares are trading at a P/E of just 9.8. That’s significantly below the five-year average of around 12 and, in my mind, undervalues the group’s growth potential. City analysts have pencilled in EPS growth of 65% over the next two years on a normalised basis. In my opinion, this kind of growth deserves a mid-teens valuation.

There’s something for income seekers as well. The shares currently support a dividend yield of 2%, which might seem stingy. But over the past six years, the distribution has grown at a compound annual rate of 35% and is currently covered 4.7 times by EPS. So, to my mind, it won’t take long for the payout to reach more attractive levels.

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Today, the firm revealed its full-year results report, which puts meat on the bones of the last update. In the period between the two news releases, the share price has been volatile, which isn’t surprising given the convulsions in the wider market. However, despite bouncing up and down a bit, the stock has held its own and is close to the level it was at the beginning of October. I see that as positive because many small-cap shares have plunged by 30% or more.

Operational and share-price volatility

Topps Tiles is perhaps one of the most cyclical firms you could invest in. I reckon tiles would be on the list of the first things that people will remove from their domestic budgets in tough economic times. It’s often easy to postpone the refurbishment of a kitchen or a bathroom, which means the incoming cash flow and profits for the firm can ebb and flow. Looking at the firm’s financial record reveals the operational volatility. Adjusted earnings per share rose 22% in the trading year to September 2014, 23% in 2015, 8% in 2016, and the declining trend continued into 2017 with a 14% fall. Today, the firm reported another fall at 13% for 2018 and City analysts following it expect a further decline of 2% in earnings for the year to September 2019.

It has been a case of two steps forward and then two back again, which has led to the stock languishing where it is. But one outcome is that the valuation looks low and the dividend yield high, at 5% or so, which seems to be one of the main things that attracted Neil Woodford. He said recently that he believes domestic companies are unloved and undervalued because they are already pricing in an overly bleak scenario for the UK’s economic future. My guess is that he would consider Topps Tiles as fitting that category.

The chief executive Matthew Williams said in the report that the firm had doubled its market following the September 2017 acquisition of Parkside Ceramics, which operates in the commercial sector rather than in the domestic sector. The overall market has been challenging during the year, but Williams points to “market-leading” gross margins in the retail division as one of the positives, although sales were flat year-on-year.

Mixed outlook

Looking forward, he is “cautious” and said that the new trading year has been “challenging” so far. Like-for-like sales in the first eight weeks “have been negative against a strong prior year comparator.” However, he is optimistic about the longer-term outlook for expansion in the commercial division.

The business looks like it is under strain to me. Whereas the dividend and valuation look attractive at first glance, I’m mindful that out-and-out cyclical firms ‘always’ look at their most attractive when they are at their most dangerous. I don’t share Neil Woodford’s enthusiasm for the stock and I remain cautious on Topps Tiles.

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Kevin Godbold 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.

Better off in a tracker

If you account for the fees the fund will charge you, it seems clear that a simple, passive, low-cost index-tracking fund would have served you better over the period. Yet Neil Woodford has never been afraid to go against the crowd and is on record as saying that periods of underperformance are normal. He’s always bounced back before, and this time he seems to be employing the tactic of investing in what he sees as undervalued UK-facing cyclical firms to drive future performance.

He thinks that “unloved and undervalued” domestic companies are “are already pricing in an overly bleak scenario for the UK’s economic future.” In his September round-up mail, he said he is “convinced” that his funds operate “an appropriate strategy for the challenges that lie ahead.” Perhaps he’s right. Some of his investee companies are beginning to sprout up green shoots, such as Topps Tiles (LSE: TPT), which delivered a positive full-year trading update today and the shares rose more than 10%. There’s a chunk of the shares in the Woodford Income Focus Fund.

Profits moving up

The firm says it is the UK’s largest tile specialist and trades from 370 sites after a bit of nipping and tucking during the year. Two new stores were opened but six were closed, which suggests that the directors are cutting their losers. And most seasoned investors and traders know that’s the best way to score consistent positive returns overall. Indeed, the figures are encouraging. For the 52-week period to the end of September, the firm expects adjusted revenue to come in a little over 1.5% higher than the equivalent period last year. However, the like-for-like figure is flat, suggesting the business is at least holding its own despite the tough trading environment. There was a slight upturn in the final quarter with the like-for-like figure moving 1.2% higher.

The directors expect adjusted pre-tax profits for the period to come in “slightly ahead of the top end of the current range of market expectations.” My guess is that this positive statement is what excited the market today. But we are not out of the woods yet. Looking ahead, they said the “uncertainty in the UK economic outlook” is keeping them cautious.

After the well-reported string of plunging shares in his funds, Neil Woodford must be pleased to see this one going up. However, I’m still not persuaded that buying cyclical firms now is a good idea, and I’m not brave enough to pile into Topps Tiles for the time being.

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Topps saw like-for-like revenues backtrack 2.3% during the 13 weeks to July 1, continuing the steady top-line deterioration seen since the start of the fiscal year. Sales on a comparable basis rose 3.4% during quarter one and fell 2.2% in the second quarter.

The building materials business advised that “trading over the third quarter has been reflective of a weaker consumer environment,” though it added that “we continue to outperform the overall tile market.” This last point should come as little comfort to owners of Topps Tiles’ shares however, given the vast sums it is investing in improving its product ranges and store refurbishments and openings.

On the slide

Last time I covered Topps Tiles in March, I warned of the intense pressure on shoppers’ spending power that has damaged sales at the business. Today’s release again vindicates my concern and has reinforced my bearish take on the retailer’s fortunes.

City analysts have been scaling back their earnings forecasts in the weeks since my latest article and they are now predicting a 15% slump for the year to September 2019. With trading conditions still worsening I reckon further downgrades are just around the corner, making Topps Tiles’ low forward P/E ratio of 9.6 times something of an irrelevance.

I am also not tempted by it as a dividend stock. A 3.3p per share reward is currently anticipated by the number crunchers, and this figure — which yields an impressive 5.3% — is also covered 2 times by anticipated profits, bang on the company’s stated target.

But given the prospect of earnings also disappointing, as well as the predicted 3% profits bounceback forecast for fiscal 2019, I reckon the business, which of course already cut the dividend last year, could reduce shareholder rewards more than anticipated. Its hefty £25.1m debt pile (as of March) should give additional cause for concern. I would sell the stock without delay.

Join the club

There’s another 5% yielder I’d much rather plough my investment cash into today, namely Morses Club (LSE: MCL).

Assisted by predictions of further healthy earnings growth — rises of 14% and 16% are predicted for the periods ending February 2019 and 2020 respectively — the doorstep lender is anticipated to lift fiscal 2018’s 7p per share dividend to 7.8p in the current year and to 9p in the next.

Morses Club carries monster yields of 5.1% and 5.8% for these respective years as a consequence. And the company’s last market update last week, in which it advised that “trading in the first four months of our current financial year has been strong,” convinces me that it can meet such impressive profits and dividend estimates.

A forward P/E ratio of 11.5 times is much too cheap given the rate at which its loan book is swelling and its customer base improving. I reckon Morses Club is a great income share to buy today.

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However, as today’s trading update from the firm shows, Topps’ outlook is not as clear as it once was. Like its peers across the retail sector, Topps is struggling to grow in the increasingly competitive UK retail market. According to today’s update, like-for-like sales in its fiscal second quarter slumped by 2.2%, dragging growth down to just 0.6% for the 28-week period ending 31 March. Even though this reported figure is slightly better than last year’s sales contraction of 1.9%, management is expecting things to get worse before they get better. 

Further pain ahead

Commenting on today’s sales figures, CEO Matthew Williams said: “After a strong start to the year, market conditions have become more challenging over the second quarter.” And while the group has performed better than the wider tile market so far, management is “retaining a cautious view of market conditions for the remainder of the year.” 

Based on this outlook, it would appear that Topps is going to struggle to grow in 2018, something analysts had already been expecting. It is also now possible that the firm’s earnings might contract for the second year in a row, putting pressure on management to take drastic action to rekindle growth. 

With this being the case, no matter how attractive the dividend yield and lowly valuation of 11.3 times forward earnings seems, I would avoid the stock. 

If you are looking for income, a better buy might be 9% yielder Galliford Try (LSE: GFRD). Based on current City estimates, shares in Galliford support a dividend yield of 9.4% and trade at a forward P/E of 5.2. Unfortunately, the high yield comes with a degree of uncertainty. 

Getting worse before it gets better

In February the company announced that it was cutting its interim dividend from 32p to 28p per share and issuing £150m worth of new shares to cover liabilities stemming from the collapse of outsourcer Carillion. As my Foolish colleague Roland Head pointed out at the time of the fundraising, due to the higher number of shares in issue, and management’s target to maintain dividend cover at two times adjusted earnings, this could mean Galliford’s annual distribution falls to 67p per share for 2018, giving a potential dividend yield of 8.2%. 

While a full-year dividend cut is disappointing, a yield of 8.2% is nothing to be sniffed at. It is still more than double the FTSE 100 average. What’s more, according to my figures it won’t be long before the payout starts growing again.

After taking a step back in 2018, City analysts are expecting earnings per share to return to growth in 2019, hitting 162p. A 50% payout ratio implies a dividend of 81p per share based on this figure, giving a potential forward dividend yield of 9.8% on today’s share price of 818p.

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However, these pieces also look at a number of Woodford favourites that stand on shaky foundations, and which I would therefore sell without delay. Here are two.

Made of straw?

Predictions that Purplebricks’ (LSE: PURP) low-cost model would revolutionise the estate agency industry and pave the way for brilliant earnings growth saw the share price go gangbusters during the first half of 2017.

This rapid ascent, underpinned by expectations that expansion into the US and Australia would replicate its success in Britain, caused investors to eventually take a back seat as its valuations ballooned. It’s a company with plenty of promise but little else, as many have been quick to point out.

Even as share pickers have been quick to cash in on this strength and book profits, Purplebricks still trades on eye-popping earnings multiples. Its bottom line is expected to remain underwater with losses of 5.9p per share in the year to April, according to City analysts, but then to pop up with earnings of 1.7p in fiscal 2019.

This leaves the business dealing on a gargantuan forward P/E ratio of 249.2 times.

Latest trading details from Purplebricks were certainly impressive, with the 6,160 instructions it received in January up by around two-thirds from the same 2016 month, and its online market share improving to 77%. However, recent housing market data revealing a steady downturn in homebuyer appetite could see the amount of business it can drum up begin to fall in the months ahead, and this could prove catastrophic for the company’s share price, given its premium rating.

A recent note by Jefferies questioning completion rates showed just how quickly investors are keen to dump the stock when news flow starts to alarm. I would prefer to sit on the sidelines than take the plunge right now.

DIY SOS

Even if trading performance has been a little better in recent months, I find returning investor appetite for Topps Tiles (LSE: TPT) something of a mystery as difficult conditions look set to persist.

Investors started barging back into the FTSE 250 retailer long before its bubbly trading statement in January, a release in which it advised that like-for-like sales had risen 3.4% during the first quarter, speeding up from the 0.3% rise chalked up in the same 2016 period.

Topps Tiles’ strategy of “out-specialising the specialists” by investing in its product ranges and customer service proposition has proved effective in jump-starting sales more recently and kept it outperforming the broader market. But the business still has plenty of trouble to face as weaker consumer spending power puts demand in the DIY segment under increasing pressure, something that B&Q owner Kingfisher will attest to.

City analysts are expecting earnings to slip 8% at Topps Tiles in the year to September, although a 3% rebound is forecast for fiscal 2019. I think hopes of a near-term recovery are built on shaky foundations however, and therefore not even an ultra-low forward P/E ratio of 12.4 times is enough to tempt me in.

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Since mid-2015, shares in the business have lost around 50% of their value, thanks to sluggish trading, although it now looks as if this cloud overhanging the company is starting to dissipate. 

According to a trading update published by the firm today, covering the 13-week period to 30 December, like-for-like revenues for the first start of the current financial year increased by 3.4%, compared to growth of just 0.3% for the previous year. 

According to Matthew Williams, this growth, which is higher than the rest of the market, “reflects the continued success of our strategy of ‘Out-specialising the Specialists’,” a scheme devised by management to offer completely different tiles in Topps’ stores than the rest of the market. According to management, differentiated products now account for almost 90% of tile sales. 

Opportunities for growth 

As well as offering a unique product set, Topps is also developing a new division targeting the commercial tile market. To complement growth in this division, the group acquired Parkside Ceramics in September. According to today’s update, the “Parkside commercial offer was launched at the 100% Design trade show in October,” and the enlarged company’s first commercial showroom opened in Chelsea in December.

The benefits of this expansion into the commercial market should start to trickle into group results over 2018. If trading figures for the company’s first quarter are anything to go by, then it’s going to be a good overall year for the firm. City analysts are currently expecting revenue growth of 3.3% for the full year but earnings are expected to slide 8% on higher levels of investment. Pre-tax profit is projected to tick higher by a few hundred thousand pounds. 

And considering Topps’ valuation, there’s room for considerable upside in the shares if the group beats expectations. The shares currently trade at a forward P/E of 11.5 and yield 4.5%, so are both cheap and offer a market-beating dividend yield. 

High demand 

Over the past five years, shares in litigation finance provider Burford Capital (LSE: BUR) have returned more than 1,000% excluding dividends. 

The shares have been able to smash the market thanks to the business’s underlying growth. As it turns out, providing litigation finance, and managing funds for those wanting to invest in such instruments is a lucrative business. For 2017, City analysts are expecting the firm to book a pre-tax profit of $164m on revenue on $227m, a pre-tax profit margin of 72%. 

Unfortunately, for 2018 analysts are expecting Burford’s growth to slow but I don’t believe that this will hold back the shares. Earnings per share are expected to slide by 28% from 76p for 2017, to 55p for 2018. 

There is some uncertainty around the predictability of Burford’s earnings, so this figure could be revised higher throughout the year. It’s clear the company is the industry leader in its field, and if first-half 2017 numbers are anything to go by, investors are queuing up to invest in the business. Indeed, during the period, Burford’s new investment management business closed the most substantial investment fund ever raised within the sector, at $500m, to invest in sophisticated strategies. 

Still, despite the company’s bright outlook and leading position, the shares look a bit expensive at a forward P/E 14.8 times forward earning 

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It’s little wonder then that Neil Woodford has built up a 5.1% stake in the company’s shares. And while Topps’ performance is tied to the health of the domestic housing market, investors who are bullish on the long-term outlook for the domestic economy could find now an attractive point to begin a stake in the company, trading as it is at just 11.6 times trailing earnings.  

And the company’s Q1 trading update released this morning show that consumer confidence in the housing market may be surprisingly strong. This is because the group’s like-for-like (LFL) sales rose a full 3.4% in the period, a significant increase from the 0.3% growth posted in the comparative period a year ago.

Positive same store sales have sent Topps’ share price up nearly 8% in early trading as it has lessened fears of another year of shrinking sales, as happened in the full year to September.  Last year LFL sales dropped 2.9%, which caused revenue to fall to £211.8m and adjusted pre-tax profits to drop from £22m to £18.6m.

However, even with this fall in profits the company was still in good shape with operations kicking off £22.2m in cash, net debt a mere £27.5m and dividend payments covered twice by earnings. And if Q1’s solid performance foreshadows a return to full-year LFL sales growth, I reckon Topps’ share price could continue its positive run for some time to come.

Cash, cash and more cash 

Judging by his funds owning a whopping 20% of its outstanding shares, Woodford is even more bullish on the prospects for PayPoint (LSE: PAY). The company, which offers point of sale solutions and ancillary services for retailers in the UK and Romania, kicks off a nearly 6% yield and trades at around 14 times trailing earnings.

These figures make it clear why value investors should be sniffing around PayPoint, and I think they won’t be disappointed in the company over the long term. This is because it has a stranglehold over the UK market for point of sale terminals to small retailers such as off-licenses.

The company charges these independent and chain customers a monthly rental fee for their terminals and also brings in revenue from offering additional services such as bill pay, click-and-collect for parcels, and ATMs that drive customer foot traffic and result in higher revenue for both the retailer and PayPoint.

In the coming years there’s significant scope for revenue from these retail services to grow at an accelerated pace as the new PayPoint One terminal is rolled out and drives revenue per retailer higher. In turn, this should increase its already prodigious cash generation that saw the business throw off £29.5m in operating cash flows from £97.6m in revenue in the six months to September.

With a huge pile of cash waiting to be returned to shareholders or invested in acquisitions, a sane valuation and market-leading position I see plenty to like about the firm.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.