Two penny stocks I reckon could capitalise on any potential economic positivity ahead are Topps Tiles (LSE: TPT) and HSS Hire Group (LSE: HSS).
I already own shares in Topps, so may look to add further shares. However, I’d happily snap up some HSS shares when I next have some investable funds.
What do they do?
Topps is one of the largest tile and flooring retailers in the country, with an extensive retail presence.
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HSS is one of the leading names in the construction equipment hire industry across the UK. It also possesses a strong retail presence throughout the country.
Why am I tipping these stocks to climb?
The construction sector has been under immense pressure in the past 18 months or so. This is linked to economic turbulence, including higher interest rates and inflation.
We’re now under a new government as of last week! This means certain economic issues are going to be prioritised to combat issues and push growth.
A few of these issues could translate into good news for Topps and HSS. Firstly, there are rumours that an interest rate cut could be just around the corner. This could spell good news for housebuilders, and as well as the property market in general.
Construction firms and homeowners may now be back in the market for flooring, as well as tool hire to tackle projects. This could boost both stocks’ share price, as well as earnings and potentially returns too.
The other greenshoot is the new government understanding the need to tackle the housing imbalance in the UK. Demand is currently outstripping supply. With inflation levels coming down, and a potentially more favourable housing market, demand for construction tools and flooring could see HSS and Topps benefit in the long run too.
My investment case
Starting with Topps, the bull case includes its extensive experience, and wide reach, as well as dominant market position.
In addition to this, a dividend yield of 9.2% has been pushed up by a falling share price, but it looks sustainable based on a decent looking balance sheet. However, I do understand that dividends are never guaranteed.
From a bearish view, competition in the tiling and flooring market is more intense than ever. As shopping habits have changed, online-only disruptors threaten Topps’ market presence. Plus, Topps has to consider the hefty expense that comes with renting, owning, and maintaining a large retail network. This could dent earnings and returns.
Moving onto HSS, the draws of buying some shares are similar to that of Topps shares. It’s rare to come across small caps that have been operating for many years, with lots of information readily available, a good market position, and decent growth prospects. The business opened 29 new merchants last year, and is looking to capitalise on greener pastures ahead for the construction industry. Plus, a forward dividend yield of over 7% is attractive too.
However, from a bearish view, the similarities with Topps continue. Aside from competition and retail outlets to worry about from a cost view, inflation could rear its ugly head once more, and cause private and commercial construction projects from going ahead. These aspects could hurt earnings, returns, and sentiment.
