Looking ahead to the coming year, what bargains might I add to my portfolio now in the hope of future gains? One penny stock I bought this year continues to look like it offers good value to me.
Indeed, if I had spare cash to invest, I would buy some more of its shares for my portfolio.
Well-established market position
The share is building supplies distributor Topps Tiles (LSE: TPT). It operates a network of shops and online stores that sell tiles and other similar products like vinyl flooring to trade and private customers.
I see this as a good market to operate in.
Every year, new homes are built and almost all of them will require at least some tiling. Meanwhile, people moving home or simply refreshing the look of their existing house also want to buy tiles.
Of course, if the housing market is weak or household spending falls, there is a risk demand could decline. But I reckon there will always be a baseline level of demand, which is one of the strengths of the business model.
In recent years, Topps has aimed to capture a fifth of this market, a target that it has now achieved. The company has critical mass, which can help it when it comes both to brand awareness and profit margins.
Strong cash position
That has helped the company perform fairly well over the long run. Last month, it unveiled its full-year results. Revenue was up 6% and hit an all-time high.
However, basic earnings per share fell almost two thirds. Yes, the company still earned 1.6p per share. But that was well below the 3.6p per share paid in annual dividends.
Can the dividend and 7% yield of this penny stock last? Although dividends are never guaranteed, I think the answer is that the payout and juicy yield could indeed survive at their current level.
The fall in profits was in large part down to cost inflation. This is cooling and I think it could cool further. Over time, the company may also have more leeway to pass price increases onto customers as its competitors do.
Topps remains highly cash generative and indeed last year its cash increased by £7.2m. At the end of September, it was sitting on net cash of £23m. That is almost a quarter of its current market capitalisation.
Why I’d buy
I do see some risks here, for sure. But as a long-term investor, I like the prospects of the business in coming years and decades. It has a strong position in a market I expect to endure, with a proven track record of being able to turn a profit and fund a juicy dividend.
That makes it a penny stock I am happy to own – and indeed would be happy to keep buying at the current price.
