Penny stocks offer huge growth potential! Here’s 1 I like

Penny stocks usually pose greater risks than more established stocks. These cheaper priced, usually smaller, firms can also offer huge upside potential too. Topps Tiles (LSE:TPT) is a penny stock I believe could be a good addition to my portfolio. Here’s why.

Number 1 tile retailer in the UK

Topps Tiles is the UK’s number one tile retailer. It has a store network of over 300 locations throughout the country. Most of its locations are ‘large edge-of-town store formats,’ meaning it tends to operate in larger premises away from town centres.

In addition to this, Topps also has a Topps Tiles Boutique arm with smaller locations as well. It trades through retail and trade channels. The trade channel offers it an opportunity to carve out a customer base in the burgeoning construction industry due to economic reopening.

Penny stocks are those that trade for less than £1. As I write, shares in Topps Tiles are trading for 65p per share. A year ago shares were trading for 43p per share which is a 51% return over 12 months. Year-to-date, the Topps share price is up 14% from 57p per share to current levels.

Why I like Topps Tiles

1. Many penny stocks often suffer from negative investor sentiment due to a lack of information and track record. Topps Tiles is a 50-year-old business that has continued to grow. This growth has continued even while the face of retail has changed from physical stores to online shopping. It also has a good track record of performance. I understand past performance is not a guarantee of the future but I use it as a gauge nevertheless. For example, between 2017 and 2019, revenue and gross profit increased year on year. 2020 levels did drop but this was due to the pandemic and store closures.
2. The pandemic led to a DIY craze. I admit to being one of the new DIY enthusiasts since the pandemic began although I haven’t attempted tiling (yet)! This new set of skills could continue and see fewer people call tradespeople and do it themselves, benefiting firms like Topps.
3. The burgeoning house building sector will benefit sales at Topps too. Property prices are on the up and there is a well documented shortage of homes, which house builders are attempting to cater for. As the UK’s number one tile retailer with a dedicated trade arm, Topps could see its performance boosted.

Penny stocks have real risks

I need to keep in mind that Topps Tiles’ operations are cyclical, which means if the economy and house building demand were to suffer, Topps could suffer a decline in performance. Next, competition is rife in the construction and tiling industry. Retail and trade customers are always looking for the best deal. The rise in online-only firms who don’t need to worry about paying for premises could hinder Topps’ performance too.

Overall, I believe Topps Tiles is one of the best penny stocks out there. It has some excellent unique selling points and an established track record of success and growth. The current delicate state of the economy, with rising inflation and cost of living, does worry me as it could affect Topps’ performance. Despite that, I would add Topps shares to my portfolio at current levels.