A cheap penny share this Fool doesn’t think will stay below £1 much longer!

Looking for low-cost, small-cap stocks to buy? Royston Wild thinks this could be one of the hottest penny shares on the UK stock market today.

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Investing in penny shares is a high-risk but potentially high-reward trading strategy. It isn’t suited to novice investors, or those not willing to put their capital in danger. But experienced traders who can handle volatility can enjoy great success in trading these small-cap stocks.

For a company to qualify as a penny stock, we at The Motley Fool believe it must meet two criteria. In addition to trading below £1 per share, it must also have a market capitalisation below £100m.

Michelmersh Brick Holdings (LSE:MBH) is one great UK share I don’t think will be a penny stock for long. It trades at 94p per share and has a market-cap of £88.1m.

Up and down

Building materials supplier Michelmersh has been dipping in and out of penny share territory more recently.

Strong share price gains during autumn lifted it above the £1 per share mark in late 2023. But receding hopes of imminent interest rate cuts pulled the Alternative Investment Market (AIM) share back below this threshold in early 2024.

Higher rates are having severe implications for brickmakers by pushing mortgage rates up. This has caused demand for newbuild properties to sink of late as buyer appetite has dried up.

Strength in depth

But Michelmersh has remained remarkably resilient despite these troubles. Organic revenues rose 10.3% in the six months to June, while pre-tax profits edged 7.1% higher year on year.

And encouragingly, the business told the market in November that trading had remained “resilient” in the final quarter of 2023.

This toughness is thanks in part to the company’s diverse range of end markets. As well as supplying the newbuild home market, Michelmersh supplies large amounts of product to the repair, maintenance and improvement (RMI) sector, commercial regeneration, and social and specialist housing segments.

Green shoots

With signs of recovery emerging in the housing market, I think a re-rating of the penny stock’s valuation could be coming.

A string of major housebuilders including Persimmon, Taylor Wimpey and Barratt Developments have all announced improved sales in recent months. This comes as Halifax recently announced average home prices rose for their fifth straight month in February.

And with the Bank of England still expected to cut rates this year, the housing sector outlook remains largely encouraging.

City analysts certainly believe that Michelmersh’s share price is about to spring higher. The three brokers with ratings on the stock have slapped an average 12-month price target of 1.55p per share. One analyst even thinks the firm could almost double in value, to 1.8p per share, in the next year.

A cheap penny share

I believe that Michelmersh’s low valuation leaves plenty of scope for a price re-rating too. The City thinks earnings will rise 9% year on year in 2024, meaning the firm trades on a forward price-to-earnings (P/E) ratio of just 9.2 times.

This is a penny share I’d consider buying to hold for the long term. I expect demand for its bricks to rise strongly over the next decade (perhaps longer) as measures to tackle the UK’s housing crisis heat up.

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.

Royston Wild has positions in Barratt Developments Plc, Persimmon Plc, and Taylor Wimpey Plc. 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.

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