1 penny stock I just had to buy at 10p!

Some investors dream of finding the next penny stock that goes on to make it big. Statistically, we know that’s unlikely, as most are valued as penny stocks for good reason. And that’s usually poor fundamentals.

My approach in this area is to filter out pre-revenue miners with exploratory assets in exotic republics and kingdoms. Also risky biotech stocks where I’d need a PHD in biochemistry to understand the technology.

As I get older, I’m adhering to Warren Buffett’s advice to “Never invest in a business you cannot understand“. There are a fair few of those about.

That 10p stock

In contrast, and to the detriment of my waistline, I believe I have a good grasp of pizza. This is why I recently opened a small starter position in DP Poland (LSE: DPP).

It owns the master franchise rights to the Domino’s Pizza brand in Poland and Croatia. These clearly aren’t remote countries. I visited both last year and am confident that Domino’s can grow further there and do well.

In fact, the first Domino’s store in Warsaw, which opened in 2011, is now one of DP Poland’s most profitable. This shows how customer loyalty is built up over time. I believe the same will likely happen in Croatia, where it only has five stores so far.

The stock is 10p, giving the firm a very modest market cap of £93m. The share price is up 57% over one year, but down 82% since early 2017.

Strong store sales growth

In the six months to 30 June, the company’s like-for-like sales increased 22% year on year. This was its third consecutive year of growth in excess of 15% in the first half.

Poland’s average weekly order count per store reached 850 during the second quarter, up from around 800 during Q4 of 2023. It’s on track to reach its target of 900.

We won’t get earnings figures till 17 September, but management is happy. CEO Nils Gornall said: “We are extremely pleased with sales growth, and look forward to the remainder of the year with confidence.”

The company is set to open 16 new stores in 2024, expanding on the current 111 locations it already has.

Long term, it has a target of 500 stores across both Poland and Croatia. So this is very much a simple expansion story in play here.

Profits may be nearing

Now, I’m mindful that the shares listed in 2010 and have since have lost 81% of their value. During this time, the company has been plagued by a lack of profitability and the need to raise capital.

Last year, it lost £3.5m on revenue of £44.6m. A history of loss-making operations adds risk to the investment case here.

However, forecasts suggest the firm could start generating profits in the next two years. It also plans to transition to a sub-franchisee model, which it says will accelerate growth and increase return on capital.

With its proven brand and backing from the global Domino’s network, the company has the potential to further increase its market share in Poland’s growing pizza delivery market.

From 10p today, I think the stock has a lot of promise. But I’m not betting the farm.