Penny stocks can offer market-beating returns, but they’re notoriously volatile investments. Although I wouldn’t want too many in my portfolio, I’ve been looking for some more speculative small-cap shares to buy that could potentially boost my stock market returns.
One on my radar is Frenkel Topping Group (LSE:FEN). This company provides specialist independent financial advice, helping solicitors and barristers involved in litigation over personal injury and clinical negligence. The stock currently trades for 64p and has a market-cap of £73.5m.
Here’s why I think this penny stock could be a good buy for me today if I had spare cash to invest.
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A niche sector
Frenkel Topping has acquired a number of businesses in recent years in pursuit of its ambition to provide a full-service offer to clients, short of providing legal advice. The group works for both claimants and defendants. Its services cover all touch points of the litigation lifecycle.
The company partners with hospitals and trauma centres to support patients immediately after traumatic injuries. It also offers a range of pre-settlement services including advice on legal costs, forensic accounting, and expert witness provision. Finally, its post-settlement services cover financial advice and ongoing care management.
The market opportunities for the firm look promising. UK clinical negligence claims seeking damages of £100,000 or more have increased in recent years.
Encouraging results
Frenkel Topping’s financial highlights for FY22 contain plenty of strong numbers. Revenue increased 35% to £24.8m, gross profit rose 23% to £11.1m, and it boasts a tremendous track record on client retention with a rate of 99% for the past 14 years.
What’s more, the company also paid a dividend of 1.37p per share last year. At present, the stock offers a 2.19% dividend yield, so there’s a decent opportunity to earn passive income from an investment too.
Its core priorities for this year include integrating its recent acquisitions, increasing its assets under management, and maintaining its outstanding client retention levels.
Risks
Of course, no stock is risk-free, especially penny stocks. Frenkel Topping’s business model is vulnerable to legal and regulatory changes. The rising cost of medical negligence claims is increasing pressure on the stretched NHS budget.
Reforming a compensation system that adds billions of pounds to the health budget every year could become a government priority. Any radical policy overhaul to the current system could potentially hurt Frenkel Topping’s profits, depending on the exact nature of the changes.
In addition, this is a competitive market. The company’s client retention rate speaks for itself, suggesting it can successfully fend off competitors. However, any failures in the advice it gives could lead to reputational damage, regulatory sanctions, or legal claims against it. Should this materialise, rivals could potentially step in to claim the firm’s market share.
Why I’d buy this stock
The Frenkel Topping share price has grown considerably over the past five years, but it’s down 13% in 2023 so far, despite promising results for FY22.
Although there are notable risks, I think this could be a buying opportunity — especially if the company’s financial trajectory remains the same in FY23. If I had some spare cash, this stock looks like it could be an attractive addition to my portfolio.
