Many speculate on which penny stocks might rapidly soar in price. But here at The Motley Fool, it’s worth reiterating that we follow Buffett’s famous investing maxim: “Our favourite holding period is forever.”
In other words, we’re not simply looking to cash out when a former penny stock hits the big time. Instead, as Fools, we’re looking for long-term investments in quality — but perhaps underappreciated — companies.
Facilities by ADF
What it does: ADF provides serviced production facilities to the film and television industry in the United Kingdom.
By Mark David Hartley. Currently trading at 56p per share with a market cap of £44.9m, I think Facilities by ADF (LSE:ADF) has strong growth potential.
Its price-to-earnings ratio (P/E ratio) is 7.5 times and earnings per share (EPS) growth rate is 32.5%. With this, I can calculate its price/earnings to growth (PEG) ratio by dividing the P/E ratio by the EPS growth rate:
7.5 / 32.5 = 0.23
In general, a good PEG ratio is considered to be anything less than 1.0. ADF’s PEG ratio of 0.23 indicates the company is significantly undervalued and likely to experience positive growth soon.
However, ADF has a high level of non-cash earnings, resulting in weak cash flow relative to earnings. This could indicate lower quality earnings which could threaten growth. Furthermore, it lacks a significant dividend track record and recently diluted shareholder earnings by issuing 6.5% more shares.
Mark David Hartley does not own shares in Facilities by ADF.
Revolution Beauty
What it does: Revolution Beauty sells make-up, skincare and hair products to major retailers, as well as selling online.
By Jon Smith. If it’s possible to have an undervalued penny stock, I think Revolution Beauty (LSE:REVB) fits the bill. Since the IPO in 2021, the stock has been hit hard with a lengthy accounting scandal. With both the CEO and CFO now out of the business, I think the storm has passed.
With a market cap of £96m and a share price gain of 20% over the past year, I think the firm can get back to better days when the firm was larger in size. With boohoo holding a 27% stake in the firm and appointing former CFO Neil Catto to serve at Revolution as of January, I believe the business is ready to start a new chapter.
Fundamentally, the business has good clients and is present in major retail stores. It has the right platform to grow, although the hangover from the accounting problems could linger for longer than I expect.
Jon Smith does not own any of the shares mentioned.
Springfield Properties
What it does: Springfield is a Scottish housebuilder with a focus on building private and affordable housing.
By Roland Head. I’m optimistic about the outlook for Springfield Properties (LSE: SPR), especially after the firm recently reported a new £15m affordable housing contract.
The company says that reduced build cost inflation has allowed to start bidding for new projects again, after a temporary pause. Over the last eight months, £40m of new contracts have been signed.
Despite this improved outlook, Springfield’s shares are continuing to trade well below the book value of its land and property assets. These were last reported at about 125p per share, well above the current share price.
The risk is that in a housing market downturn, the value of Springfield’s assets could fall. Debt problems are another potential concern, but my feeling is that the company’s finances look safe enough for now.
If Springfield’s trading continues to recover this year, I think the shares could gradually re-rate to trade above their book value, as they have done previously.
Roland Head does not own shares in Springfield Properties.
Topps Tiles
What it does: Topps Tiles is a tile, stone, laminate and and flooring retailer, and sells related products.
By Alan Oscroft. The Topps Tiles (LSE:TPT) share price recovered quickly from the Covid pandemic. But it then got a kicking from the property market slump.
The shares have lost around a third of their value in the past five years. And that takes Topps down into penny stock territory, with a share price of under 50p and a market cap of around £92m.
I think we might see weakness ahead, with some delay between mortgage rates starting to soften and the demand for building materials picking up.
And a price-to-earnings (P/E) ratio of 13 might not look all that cheap for 2024. But forecasts show it dropping as low as 8.5 in 2025 with earnings set to rise sharply.
I treat forecasts with caution. But if it comes off, I think we could be looking at a winner here.
And while we wait, there’s a forecast dividend yield of 8%.
Alan Oscroft has no position in Topps Tiles.
