I’m always on the hunt for bargain value shares. Usually, I try to find these among large-cap stocks. However, there’s nothing to say that penny stocks can’t be undervalued as well.
In fact, when I’m trying to find stocks with large growth potential, smaller companies can sometimes present the best option anyway. Here’s one I spotted this week.
Running through the basics
The company is Lords Group Trading (LSE: LORD). It has a market-cap of £80m and a current share price of 47p. Over the past year, the stock’s down 30%.
Lords is a specialist distributor of building, plumbing, heating and DIY goods. The firm principally sells to local tradesmen as well as related merchants and construction companies. It’s been in business for several decades and is targeting full-year revenue of £500m. Therefore, I’m not concerned about this being a small business that could go bust tomorrow!
Financially, Lords is doing fine. 2022 revenue was the highest ever, and although we have to wait until next month for the 2023 results, the H1 results stated that “the board remains confident of delivering our strategic targets of £500 million revenue by 2024”.
If this happens, it would be another record revenue performance. Importantly for me, the business has recorded several years of post-tax profit. Especially when I consider penny stocks, I like to see that the firm is profitable.
Recent share price dip
The 30% fall in the share price over the past year is what makes me think the stock’s undervalued. Yet before we get onto that, let’s address the fall.
Part of this can be down to the negative sentiment around the property sector. With high mortgage rates and inflation, a lot of people are pushing back DIY projects and home improvements. Or they’re deciding not to purchase a property, therefore not needing to use tradesmen or construction companies.
It’s true that even though revenue has been rising, the half-year results showed that profitability slipped. This highlights how inflation can eat away at profit margins, ultimately putting more pressure on the business to perform.
Looking cheap to me
Despite these ongoing risks, I think the stock’s undervalued. The price-to-earnings ratio is 5.99, well below the benchmark figure of 10 that I use for a fair value. Over time, I expect the share price to rally in order for the ratio to move higher.
Further, I think the property sector will recover over the coming year or so. Many are predicting that interest rates will fall this summer, which should make it easier for people to get on the housing ladder. This should all eventually flow through to higher spending at Lords for products.
A penny stock’s always risky due to it being a small company. Yet Lords has a strong track record, with a growth plan that should help the share price to outperform in the future. On that basis, I’m thinking about investing.
