Penny shares are often popular when markets are rising and growth investors are bullish. But are penny shares, at under 100p with market caps below £100m, more likely to make us a fortune than those with higher valuations?
The biggest risk is that a lot of them are down and out because they deserve to be. I’ve seen plenty valued at far less than a penny that I wouldn’t buy. Not even if someone gave me the penny and told me to keep the change.
But some low-priced stocks belong to companies that have faced tough times and have genuinely strong recovery potential. I think Topps Tiles (LSE: TPT) could be one of them.
Back from the bottom
Now, I must offer a confession. I’ve been bullish about Topps Tiles for a few years. But after a 2024 loss, the share price slumped to 28p in March 2025. It’s had a bad decade.
Since that 52-week low, we’ve seen a 36% rise, with the outlook improving. But there’s still some way to go to fulfill millionaire hopes.
Next few years
Analysts expect a profit this year that would put the price-to-earnings (P/E) ratio at around 10.5. And further forecast growth could drop it to just 6.3 by 2027.
We’ve seen a few false starts. But as we get into the next couple of years, if it looks like the company really is pulling it off, I could see the share price being re-rated upwards.
There’s a forecast 5.4% dividend yield on the cards. May’s interim update reported a “dividend of 0.8 pence declared in line with policy, and full year dividend to be at least consistent with FY 2024“. The balance sheet showed adjusted net debt of £1.2m, with a “£30 million banking facility committed until October 2027“. I see no liquidity problems.
Annual returns
Forecasts expect dividends to grow 60% by 2027, covered around 1.5 times by earnings. Investors buying at today’s price could lock in an effective future yield of 10% if that’s right. But what kind of annual return would an investment in Topps Tiles need to make, and for how long, to turn shareholders into millionaires?
In the past 10 years, average Stocks and Shares ISA returns have come in at 9.6% per year. Half an ISA allowance, or £10,000, invested each year at that annual return with all dividends reinvested could reach the magic million in a bit less than 26 years.
Millionaire potential?
Do I think Topps Tiles can grow that much in that time? Frankly, no. But that’s because I just don’t see its potential market as big enough to reach the needed levels. And I’d never put all my ISA cash in one stock anyway, as diversification is essential.
Topps also faces competition from some major players with big financial clout. And a micro-cap stock like this can be at far greater risk in economic hard times. We saw that in the past couple of years.
But as part of a long-term growth portfolio aimed at reaching a million overall, I do rate it as one to consider.
