1 dirt-cheap penny stock that could benefit from inflation!

This Fool believes he has identified a penny stock that may actually benefit from the rising cost of living and inflation crisis.

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Soaring inflation and the rising cost of living are major issues that the country is dealing with currently. One penny stock I think that could be well placed to benefit is The Works.co.uk (LSE:WRKS) often referred to as simply The Works.

Value retailer

The Works is a leading retailer of value gifts, arts, crafts, toys, games, books and stationery. It operates through over 500 stores in the UK and Ireland on high streets, in shopping centres and via concessions. It sells online too.

A penny stock is a stock trading for less than £1. The Works shares are trading for 55p so they easily qualify. At this time last year, the shares were trading even lower at 48p, so it has seen a 12% increase over a 12-month period. The shares did reach as high as 70p in February, but the stock market correction this year pulled many shares back, including this one.

A penny stock with risks

The Works may attract plenty of customers through its real or virtual doors due to pricing power and its value offering, but rising costs are a real worry. Many businesses are seeing their profit margins being squeezed due to the rising cost of materials throughout the world. If this continues, profits and shareholder returns could be affected. Furthermore, a price increase for its products could dent footfall and revenue.

Another risk The Works is facing is the ongoing supply chain crisis. This means it could struggle to get the products people want. Out of stock messages and empty shelves are a customer turn-off and that would hurt profits and the share price.

Why I like The Works shares

So far, so bad. But I do like the business, especially now when inflation is such an issue. The macroeconomic conditions in this country tell me that consumers will turn towards value products. And retailers that offer quality-at-a-cheaper-price products are poised to make the most of this. The Works could benefit if footfall and website traffic increase as customers seek greater value, boosting revenues and profits.

At current levels, The Works shares look dirt cheap to me on a price-to-earning ratio of just six. This makes it a bargain penny stock with growth potential ahead, I feel.

I can see The Works has a good track record of performance too. I understand that past performance is not a guarantee of the future. But in its last update in January, for the 26 weeks ended 31 October, The Works reported revenue had increased by over 30% compared to the same period in the previous year and it was above pre-pandemic levels. It also reported net cash up and losses down. Those losses were due to Covid-19 related issues and store closures.

I would buy the shares for my portfolio and hold on to them for the long term. I see it as an excellent penny stock with a decent track record, albeit blighted by pandemic issues between 2020 and 2021. In light of current macroeconomic factors, I believe it is well placed to benefit that could drive profitability and lucrative shareholder returns in the longer term.

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.

Jabran Khan 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.

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