Penny stocks tend to reach that status by starting higher and then falling. And for Topps Tiles (LSE: TPT), that’s exactly what’s happened.
The company sells tiles and flooring products, and I’ve been watching its performance for years. The last decade has been painful, and the shares have lost close to two thirds of their value.
The pandemic didn’t help. Nor did the soaring inflation and interest rates that followed. When people are struggling to pay their mortgages, there’s not much cash left for spiffing up the kitchen floor, or whatever.
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A better decade?
Trading in the first half of 2024 was tough, with earnings per share dropping by more than a third after revenue fell 6%. But Topps had net cash of £19.3m, so it’s not under threat from debt.
Forecasts show earnings growth back on track in 2025, with the price-to-earnings (P/E) ratio dropping to only eight by 2026.
These are definitely risky times to buy such a consumer-dependent penny stock. But I reckon the next decade could be a lot better, and I might buy a few shares.
In the same boat
The other one I’m looking at has suffered for much the same reason. It’s Michelmersh Brick Holdings (LSE: MBH), and the construction slump has taken its toll.
At least, it’s scared investors away, with the share price way down from its 2021 peak.
Results for the 2023 full year though beat expectations. On an adjusted basis, EBITDA rose by 6.6%.
Chairman Martin Warner, spoke of “another positive year for the group, with strong growth across our key financial metrics despite the decline in the broader construction industry.“
More cash
Again, we’re looking at a company with net cash on the books. It’s £11m in this case, up a bit from £10.6m.
At this point in the economy, with May inflation down to 2% and interest rate cuts anticipated, I think the period of peak risk has passed.
There still is risk from the construction industry, which could continue to suffer even after rates fall. And penny stock volatility could add to it.
But again, forecasts for rising earnings and a falling P/E puts this one on my list of possible buys too.
Dividends
I nearly forgot… both of these penny stocks pay good dividends. At Michelmersh, there’s a 4.7% yield on the cards. The company raised its 2023 dividend 6%, so I’m upbeat about this year’s.
And back at Topps Tiles, the forecast is for a whopping 8.7%. In this case, the H1 dividend was kept flat.
Sentiment
How well these two do in the next few years could, I think, depend a lot on market sentiment. And money coming back into the stock market and away from cash as interest rates drop could mostly go to low-risk big caps.
The mood for penny stocks could stay cool for a while. But I reckon those focused on the next decade should consider these two.
