With their huge growth potential, a number of smaller investors are attracted to penny stocks. But due to their size, many don’t feature on City analysts’ radars. However, I’ve recently come across one that’s worth 76% more, according to one broker. And the most pessimistic reckons the stock could be 35% undervalued.
With such a star billing, I reckon it’s worth a closer look. So let’s see if the stock can live up to these expectations.
Surprise!
Given that the analysts see such strong growth potential, it might come as a surprise to learn that the company in question isn’t a technology stock at the forefront of artificial intelligence (AI). Instead, it makes bricks.
Michelmersh Brick Holdings (LSE:MBH) is the UK’s largest specialist brick manufacturer and owns seven of the country’s leading premium brands.
But due to a “notable slowdown” in the construction industry in the last quarter of 2025, the group had to re-set expectations in December. Revenue for the full year is now forecast to come in at £69m and EBITDA (earnings before interest, tax, depreciation, and amortisation) is likely to be around £12.5m. By comparison, these were £70m and £14m respectively in 2024.
This lack of growth’s clearly a concern. And with revenue and earnings in the tens of millions rather than the billions, it’s a reminder of how small some listed companies can be.
But these things are relative. That’s why many investors are attracted to penny shares. It’s probably going to be easier (and if all goes to plan, quicker) for Michelmersh to double its earnings – and presumably, its share price – than it is for, say, Nvidia.
Tricky trading conditions
However, for its stock market valuation to go significantly higher, it’s going to need a strong recovery in the building sector. On the positive side, despite the slowdown, the company reported in December that it was experiencing “robust customer demand” for its “diverse product offering”.
However, it also said this had been supported by its “collaborative approach to pricing”. This sounds like price cuts to me. It also warned of “uncertain timing of brick despatches”.
Since February 2025, the group’s share price has fallen 20%. One benefit of this is that new investors can take advantage of a 5.4% dividend yield. This is based on amounts paid over the past 12 months (4.6p). Of course, if the construction industry continues to struggle, there’s a strong possibility that it will be cut. But for now, the stock could appeal to income investors.
My view
Personally, after being in the doldrums since the pandemic, I think there are some green shoots of a recovery starting to show in the sector. And there’s some evidence to suggest that the slowdown in the last quarter of 2025 could be a temporary blip. The uncertainty surrounding the Budget appears to have affected confidence.
Another plus is that the stock trades on a lower earnings multiple than its nearest rival, Forterra, which owns the London Brick Company.
Due to their size, penny stocks can be risky investments. With limited financial firepower, there’s little to fall back on should trading take a turn for the worse. However, with this in mind, Michelmersh could be a stock for more adventurous investors to consider.
