I have been on the hunt for cheap shares to buy for my portfolio after the stock market volatility of recent months. Two that came on my radar are actually ones I own already, but as long as I keep my portfolio sufficiently diversified, I am not against building a bigger stake in a company while taking advantage of a lower share price to do so.
However, while they sell for pennies each and may look cheap, in both cases there are risks that could help explain the low-seeming price.
Topps Tiles
My shareholding in Topps Tiles (LSE: TPT) has so far been very disappointing. But I have hung on.
I do recognize some of the risks that explain a share price fall of 14% in the past year. A weak economy can hurt demand for home renovation, for example.
Set against that, though, I expect that there will always be some demand for tiles, vinyls, and other such floor and wall coverings, at every point in the economic cycle. Topps can benefit from that thanks to economies of scale, a large customer base, and extensive network of depots.
Interim results this week showed group revenues up 16% year on year, while a pre-tax loss at the same point last year gave way to a £1.9m profit before tax this time around.
The interim dividend fell by a third. I do not like that, but I do appreciate management’s discipline in delivering on their dividend policy. That can help manage cash prudently.
For now, I think the share remains a potential bargain but with a lot of work still to do. So, unless the share price falls further, I will not be buying more for my portfolio. I will hang on to my current holding.
S4 Capital
Another very disappointing investment I have hung on to is digital ad agency group S4 Capital (LSE: SFOR). Just when I think the share price surely cannot go even lower, it does. S4 has lost 97% of its value since September 2021.
But I reckon this share is possibly at an inflection point. I think it may either drift down until it is worthless or else potentially stage a stunning recovery.
Sure, the first quarter saw a 12% year-on-year decline in revenues. Advertising demand may get weaker, AI threatens to eat much of the industry’s lunch, and S4’s tech-heavy client roster may well tighten their belts on spending. All bad news.
But there is another side to all this. The company has sharply reduced net debt and expects to lower it further this year. It has initiated a dividend. Liquidity and cash flow was “much improved” versus the same period last year.
Boss Sir Martin Sorrell was on the ropes like this before at WPP and went on to create enormous shareholder value. But his role also adds key-man risk to all the others.
Insiders own a large chunk of the company and have not been selling lately. Nor, though, have any dipped into their own pockets this year to buy shares despite a record low price.
That alone means that, while I think this could still be a great bargain, I will not expand my shareholding just yet. So, I continue to look for other cheap shares to buy instead.
