Penny stocks can be volatile. Yes, I know all stocks can be, but low-price ones seem to shine more than others when sentiment is bright. And they can take it harder on the chin when investors are feeling nervous.
Right now, brokers are mixed about the fortunes of these very small-cap companies in 2025. That’s in line with market sentiment in general.
On top of our painfully slow economic recovery, political events are taking their toll. Economists fear Donald Trump’s plans for trade tariffs could hurt a number of countries, including the US. And the Bank of England expects the Labour budget to edge inflation up again in 2025.
A growth year?
Still, according to Jefferies, 66% of market respondents expect the FTSE 100 to end 2025 higher. And that optimism reflects hopes for stock markets in general.
Growth looks increasingly hard to find, and I think that could affect penny shares either way. Maybe investors will step back from growth and seek safety in dividends? Or with penny stocks typically bought for growth, perhaps they’ll take a bit more risk and go for them?
Whichever way the bottom end of the market-cap range goes in the coming 12 months, I definitely see some I think are worth considering.
For the long term
I’d still only buy a penny stock based on its long-term potential and not on where the winds of emotion might be blowing.
That brings Topps Tiles (LSE: TPT) to light, though I suspect shareholders might have to be patient for a bit longer.
The share price is down 45% in the last five years, and I’m not surprised.
Topps does wall and floor tiles, laminates, wood flooring, and similar products. Those should do well when property is booming, when people are renovating and decorating, and there’s a decent bit of spare cash in homeowners’ pockets.
And, well, the past few years haven’t been kind to people in that market.
Better times ahead?
But as falling inflation and interest rates start to make building and home renovation look more attractive, I think demand could start to turn.
I do think it could take longer than we’d been expecting, mind. Every time we start to open our eyes to a brighter future, something seems to come along and kick sand in them.
Still, the share price weakness means we’re looking at a juicy forecast dividend yield of 9.1%. That’s even with a loss per share on the cards for 2024, which forecasts see reversing in 2025.
Valuation improving
I’d rate the dividend as a risky one until earnings get back to covering it. Analysts expect that to happen in 2025, though even by 2026, they only see cover of 1.4 times.
And though projected net debt looks low at £72m by 2026, this is a company with a market cap of only £79m. There’s risk there too.
I’ve come close to buying Topps Tiles in the past. And I’m considering it once again.
