Here’s a ridiculously cheap penny stock to buy today!

This penny stock is amazingly cheap! But importantly, shows excellent quality characteristics. Is it a screaming buy for my portfolio?

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Smiths News (LSE: SNWS) is a penny stock that has popped 35% this year. The company says it’s the UK’s largest wholesale distributor of newspapers and magazines, with a 55% market share. If you’ve ever wondered how your favourite newspaper or magazine is always at your local store, Smiths News is the reason.

But things haven’t worked out so well in recent times. The shares topped at around 250p in 2014, trod water for the next three years, and crashed in 2018. The pandemic wasn’t kind to the stock either, and in 2020 the share price bottomed at 11.5p. That’s a 95% plunge!

But things have picked up recently, and the shares have rebounded to 40p. I think there might still be some value here.

A successful turnaround  

Smiths News released its full-year results last week that showed earnings grew by 11.3%. Free cash flow also rose by a highly impressive 120%, and dividends are being restored after they were halted last year due to the pandemic. Even better was that management said the overall performance was ahead of expectations. 

Another good thing about the business is its high return on capital – the metric used to gauge how efficient a business is at generating profits with both debt and equity capital. It has been consistently in double-digits. I take this as a sign that the business is a quality operator.

But there’s a turnaround story playing out here. In April last year, Smiths News decided to sell Tuffnells (the green van-owning parcel delivery company) after a strategic review. Now the company is able to focus on its main distribution business, and it has brought down its cost base.

There has also been a reshuffle of the management team at Smiths News, with a new chairman and CEO coming on board.

Debt is the issue 

What about the stock’s valuation? Well, the shares trade on an incredibly cheap price-to-earnings (P/E) ratio of just four. But there’s a reason for such a low P/E that I have to remember

In the results last week, net bank debt (the worst kind) was £53.2m. The company’s market value is only just under £100m, so this is significant.

However, Smiths News was able to refinance this debt at the end of 2020 with a syndicate of banks, giving breathing room for now. If trading deteriorates though, and cash generation dries up, this will be a huge problem.

When companies have high debt, I like to use a debt-adjusted P/E to take into account the extra risk of buying shares in such a business. For Smiths News, this is still an incredibly cheap 6.5.

The bottom line

With a new strategic direction, fresh leadership and more efficient operations, shares of Smiths News might only just be starting a charge back to 250p. That would be a return for my portfolio of 525% based on a share price of 40p! But my concern is the large debt load. If the cash generation stays high, and we avoid another lockdown, I might just buy this penny stock for my portfolio.

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.

Dan Appleby 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

Businesswoman calculating finances in an office
Investing Articles

Is BP’s 6.7% dividend yield good value after the recent share price fall?

Despite the fluctuating oil price and BP's volatile shares, City analysts predict strong ongoing annual dividend payments ahead.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Up 42% from their 12-month low, is it time for me to buy this much-fancied FTSE growth stock after a 2% dip?

This FTSE 100 distribution firm achieved a lot in the past year and has good earnings growth prospects, but is…

Read more »

Investing Articles

Here’s the HSBC share price forecast through to 2026

Shares in this FTSE 100 bank have surged in 2024, but what’s next for the HSBC share price? Dr James…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Can Rolls-Royce shares continue to outperform in 2025?

Stephen Wright thought Rolls-Royce shares were undervalued heading into 2024. After a 90% rally, is this still the case with…

Read more »

Investing Articles

Here’s what Warren Buffett says is ‘always a bad investment’

Working out what to invest in can be difficult. But there’s one asset that Warren Buffett says long-term investors should…

Read more »

Investing Articles

Up 40%! Is it too late for me to grab some shares of this skyrocketing FTSE 100 giant?

With the share price soaring, our writer’s kicking himself for not buying this FTSE 100 share when he reported on…

Read more »

Investing Articles

Down 54%, here’s one of my favourite FTSE 100 bargain shares for 2025!

The FTSE 100 remains packed with value shares despite its strong showing this year. Here's one fallen angel I think…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

A cheap FTSE 250 share I think could fly during the Santa Rally!

The FTSE 250 has historically delivered its best results during December. Value shares like this one could be in prime…

Read more »