I’m searching for the best cheap UK shares to add to my portfolio. A lot of UK share investors are put off by the extreme price volatility that low-cost shares often endure. Consequently, a lot of top-quality penny stocks go under the radar. This is a shame, in my opinion.
These two top stocks trade below the £1 barrier. Here’s why I think they could deliver terrific long-term returns.
On a mission
A sparkling outlook for the advertising industry makes me think The Mission Group (LSE: TMG) could be a top buy for me today. This small-cap share provides marketing and brand-building services to businesses through a variety of individual agencies. It also has a decent global footprint that provides protection against tough market conditions in one or two markets.
The advertising market’s post-coronavirus rebound helped revenues at The Mission Group soar 17% in the first six months of 2021. Pleasingly, it seems as if the strong recovery will continue next year too. Fellow marketing business Dentsu thinks global ad spending will expand 7.2% year-on-year in 2022 to top $680m.
My main concern with The Mission Group is the size of the business versus industry heavyweights like FTSE 100-quoted WPP. It will have to row extremely hard to offset the financial might and the brand strength of mega agencies like this.
Still, at current prices, I think the penny stock could be too good to miss. At current prices of 70p, it commands a price-to-earnings (P/E) ratio of 8.2 times for 2022. Its bulky 3.6% dividend yield provides something for income lovers like me to sink their teeth into too.
Another penny stock on my radar
Building materials supplier Breedon Group (LSE: BREE) is hugely sensitive to changes in the economic conditions. A painful dip in the UK economy would have serious implications for the construction industry and, as a consequence, demand for this penny stock’s products.
While this is a danger, I think at current prices Breedon looks exceptionally attractive from a classic risk-to-reward perspective. The business trades at 97p today, leaving it on a price-to-earnings growth (PEG) ratio of 0.6. This is well below the benchmark of 1 that suggests a UK share is undervalued.
There’s several reasons why I like Breedon. The business supplies bricks, roof tiles, aggregates, cement and loads of other essential building products. It therefore stands to gain from planned infrastructure upgrades in Britain and Ireland. I’m also expecting a shortage of new homes on both sides of the Irish Sea to boost demand for its goods as housebuilding activity ramps up.
Finally, I’m impressed with Breedon’s “encouraging” acquisition pipeline. It’s something I think could turbocharge long-term earnings growth. Leverage has fallen considerably over the past year too, giving the company more wriggle room to execute its ambitious M&A strategy. This helped the business snap up ready-mix concrete specialist Express Minimix back in June.
