These 3 penny shares look dirt cheap. Should I buy?

Penny shares have the potential to deliver great returns for risk-tolerant investors. Paul Summers runs the rule over three temptingly priced minnows.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

British Pennies on a Pound Note

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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?


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 (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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »