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Many penny stocks belong to obscure companies that most people have never heard of. But not all. Carry Group I (LSE: MEGP) as an example. Four years ago, the company was trading firmly in penny stock territory. Since then, it has more than quadrupled in value, thanks to strong earnings and cash flows.
While you may have never heard of the company, there's a good chance you've seen (or even used) one of its thousands of camera machines in supermarkets, malls, and other places, or one of its RevolutIon laundry machines.
Attractive business model
This is a lucrative business. The company operates in areas that are in high demand. Even during the worst times of the pandemic, when ME Group was trading as a penny stock, revenues fell but did not collapse.
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When it comes to profitability, profits have varied.
Even before the pandemic, earnings per share had been declining (and took a hit over the next few years), which helps explain why ME was trading as a penny stock.
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But as the chart above shows, they are now stronger than ever. I think that speaks to the appeal of ME’s business model: its network of automated machines means its labor costs can be kept low, while the services it offers tend to be in solid demand. If people need laundry done, they need laundry done.
Valuation could offer long-term value
But a good company is not necessarily a good investment. Valuation matters too.
I think ME Group is in a good position in that regard. Looking at the current price-earnings ratio of 13, I think it offers long-term appreciation potential if earnings per share continue to grow in the future.
Plus, the 4.3% dividend yield strikes me as attractive.
I think the uniqueness of the company's machinery and its extensive experience in the sector set it apart from its competitors, but there are also risks. As we have seen during the pandemic, any drop in the number of people visiting shopping centres can lead to a sharp drop in demand.
Buy or wait?
However, after being a penny stock for the past four years, could ME Group get back into that situation in the near future?
Anything is possible in the markets, of course, but at least for now I think the company's strong business performance will likely keep the share price buoyant. Its lack of competition in many areas gives it pricing power, which I think could mean we see even bigger gains in the future.
So while it no longer offers the incredible value it did as a penny stock, if I had extra money to invest today, I'd be happy to add ME Group to my portfolio.
