Here’s a success story that shows how penny shares can deliver

What do we want penny shares to do? Grow to 100p and stop being penny shares. When do we want it? Oh, it’s already happened!

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Investor looking at stock graph on a tablet with their finger hovering over the Buy button

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I just took a look at Michelmersh Brick Holdings (LSE: MBH), on my penny shares watchlist. And I see it’s not a penny share any more!

Well, it’s actually only just out of the ‘less than 100p share price’ limit, exactly 100p at the time of writing.

But it is, for me, a top example of why we should ignore the share price and look at the underlying company.

Should you invest £1,000 in Airtel Africa right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Airtel Africa made the list?

See the 6 stocks

Created with Highcharts 11.4.3Michelmersh Brick Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Tough few years

That chart shows the share price has had a tough few years.

The name gives it away a bit, but Michelmersh makes bricks and similar things, including roof tiles. And the building business hasn’t exactly been sparkling since, first, the pandemic gave it a kicking.

And now inflation and interest rates are so high that fewer people can afford to pay builders to cement Michelmersh bricks together for them.

But here’s where the investing lesson comes in. I reckon Michelmersh in the past few years has provided a great example of how investors should approach a penny stock.

Valuing penny shares

Penny stocks usually get to be penny stocks by having a hard time, like this. And the trick for us is to decide whether they’re going to the wall, or have a better long-term future ahead of them.

For me, the balance sheet is key. Profits might be down. But if a company has the means to make it through the hard times, it can shine when things look brighter.

Between early 2021 and late 2022, the Michelmersh share price pretty much halved to around the 75p mark. So what did things look like at the end of that period?

I think excellent, in one crucial way.

It’s cash that counts

The company recorded positive cash flow, and posted 2022 year-end net cash of £10.6m. Net debt can kill a down-and-out company, so net cash that year was tops.

I see the books had carried net cash in 2021 too. Not as much, at £7.7m, but pretty good in such a painful time. Remember, Rolls-Royce Holdings saw its net debt spiral to over £5bn that year.

In fact, perhaps ironically, the company was buiding up net debt going into the pandemic. But from 2020 onwards, every year has ended with net cash.

And that happy situation has persisted right up to interim results in 2024.

The future

There’s a forecast 4.6% dividend yield on the cards.

Earnings are predicted to rise, dropping the 2024 price-to-earnings (P/E) ratio of 14.5 down to 10.3 by 2026. Perhaps not super cheap, but I’d say fair value.

Volatility is my biggest fear in the next few years. Until we get back to a lower interest rate environment, I expect more ups and downs here. And there’s potential for competition with such a small-cap company, plus the industry this company operates in is very dependent on consumers feeling good about the economy.

But can anyone think of an industry that’s more likely to still be around a century from now than building? It’s got to be up there with energy, finance and food.

I considering a purchase here.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. 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.

More on Investing Articles

Investing Articles

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »