The UK’s flagship index is up over 10% since January, reaching a new record high. But at the same time, the HSS Hire (LSE:HSS) share price is up almost 60%. And anyone who threw £5,000 into the mix seven months’ ago is now sitting pretty on £7,850.

The question now is, can the penny stock keep climbing even higher?

Investigating the surge

The upward trajectory of this equipment rental firm is a welcome reversal to the downward trend shareholders have had to endure for the last several years. For reference, between its peak in 2021 to the start of 2025, this business saw its market-cap shrink by over 75%. And even with the recent reversal, it’s still down around 60%.

However, if the company can maintain its momentum, it may not be long before the stock recovers. So what’s driving this rebound?

Management’s been busy restructuring the company to streamline operations and refocus strategy on the core UK market. It recently sold off its Irish business, using the proceeds to start mending the cracks in its balance sheet. At the same time, multiple cost-cutting initiatives have been introduced, optimising its network of locations, bolstering efficiency and profit margins.

Given the encouraging progress management’s made to date, investor sentiment’s improving. Even more so, given the firm’s digital marketplace for building services is expanding rapidly despite a generally weak UK construction market.

There are now over 2,200 buyers on its platform, which management’s aiming to grow to 7,000 in the medium term. And given the high-margin nature of its software-as-a-service venture, HSS Hire’s profitability could expand significantly as it scales.

What could go wrong?

HSS Hire’s long-term potential appears to be quite promising. But like all investments, success isn’t guaranteed. The downturn in the wider construction market is also certainly not helping matters.

While interest rate cuts may help spark some fresh growth, equipment rental’s a fiercely competitive industry with titans such as Ashtead Group dominating the supply. This limits the group’s ability to exercise pricing power. And if Ashtead decides to slash prices, HSS will likely have to follow in its footsteps, putting pressure on its profit margins.

That would be particularly problematic given that profitability has yet to stabilise. To be fair, the firm’s financials have started to improve courtesy of its restructuring efforts. But it’s still too early to tell whether management has delivered a sustainable long-term gain or just a temporary short-term boost.

The bottom line

HSS Hire seems to be getting its affairs in order. The journey towards recovery still has a long way to go. But the early progress is encouraging, especially considering the current market environment.

As a penny stock, HSS Hire shares will no doubt continue to be volatile. But given the group’s turnaround potential, it’s a business that may be worth taking a closer look at.

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It also reflects the volatility that small-cap shares often experience.

What they’re less famous for, however, is the presence of high dividend yields. This simply reflects the fact that younger companies tend to prioritise any spare capital they have to investing for growth rather than paying shareholders cash rewards.

However, the following penny shares are the exception, offering an attractive blend of value and dividends. And today their dividend yields sail comfortably above the 3.6% average for FTSE 100 shares.

Here’s why I think they’re worth serious consideration today.

HSS Hire

With a forward price-to-earnings (P/E) ratio of 7.7 times and 9.8% dividend yield, HSS Hire (LSE:HSS) offers attractive all-round value. Its cheapness reflects tough economic conditions in its markets, and by extension an uncertain profits outlook.

The penny stock is a prominent supplier of tool and equipment hire services in the UK and Ireland. Despite its position as market leader, continued weakness in the construction sector poses obvious dangers to shareholder returns.

Yet, for patient investors, I believe HSS shares could eventually prove a shrewd buy. It has major structural opportunities to exploit, such as government plans to build 1.5m new homes between now and 2029, and the fast-tracking of 150 major infrastructure projects.

In the meantime, HSS is extensively cutting costs to help it ride out current market difficulties.

Topps Tiles

Tile retailer Topps Tiles (LSE:TPT) shares many of the same qualities and problems as HSS.

Near-term earnings are under threat from difficult conditions in end markets. On top of this, the sector in which this penny stock operates is highly competitive.

Yet, like the tool hire giant, it also has significant long-term structural opportunities as Britain gets building again. And as market leader, it’s in the box seat to exploit any market upturn (it has 20% of the tile market).

For this fiscal year (to September 2025), its shares trade on a forward P/E ratio of 8.9 times. They also carry a market-beating 8% dividend yield.

Alternative Income REIT

Alternative Income REIT (LSE:AIRE) isn’t a conventional penny stock in that it prioritises dividend distribution over earnings growth. This reflects its status as a real estate investment trust (REIT).

Under REIT rules, at least 90% of yearly rental earnings must be paid out by way of dividends. For this financial year (ending June 2025), this means an 8.7% dividend yield.

With exposure to multiple sectors including healthcare, retail, residential, and industrial, Alternative Income’s diversified model provides stable earnings across the economic cycle.

It’s still vulnerable to interest rate movements that can push up borrowing costs and depress asset values. But I think this threat is more than baked into its rock-bottom valuation.

Today it trades at a 13.9% discount to its net asset value (NAV) per share.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

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If the stars align as well as investors hope, these shares can potentially deliver returns far greater than the broader stock market.

However, penny shares aren’t just about soaring profits and share price growth. Some sub-£1 companies can also be great buys for those seeking a large and growing passive income.

With this in mind, here are two small-cap growth and dividend stocks — along with one dirt-cheap penny stock — I think are worth a close look today.

Growth

Serabi Gold‘s (LSE:SRB) share price has soared in 2024 as gold prices have taken off. In recent days they hit fresh peaks above $2,480 per ounce, and with inflationary worries persisting — and concerns over the worldwide political landscape growing — demand for the safe-haven metal could keep on surging.

City analysts certainly believe so. This is reflected in their bright earnings forecasts for Serabi Gold: profits are tipped to grow 173% and 54% in 2024 and 2025, respectively.

Profits should also be boosted by a steady production ramp-up at Serabi’s Coringa mine in Brazil over the next few years. This is expected to drive group output to 60,000 ounces per year by 2026 from a predicted 38,000 to 40,000 this year.

But investors should remember that any unexpected surprises could throw these growth estimates off course.

Dividends

Property stocks can be a great way to source a regular passive income. The rents they generate are often payable under long-term contracts, providing a steady stream of income that they can distribute to shareholders.

Real estate investment trusts (REITs) in particular can be lucrative dividend stocks to own. Rules state that they must pay at least 90% of annual rental profits out in the form of dividends.

Alternative Income REIT (LSE:AIRE) is one such company worth a close look today. While it isn’t immune to economic downturns, its wide sector footprint (spanning healthcare, retail, residential, and utilities, for instance) helps to reduce this risk and its impact on investor returns.

And today, Alternative Income sports a huge 8.9% forward dividend yield.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Value

HSS Hire Group (LSE:HSS) has suffered of late as higher interest rates have put the brakes on construction sector growth. This could remain a problem too if inflation remains high and the Bank of England doesn’t cut its benchmark.

I’d argue that this threat is baked into HSS’ ultra-low valuation, however. Today the rental equipment supplier trades on a forward price-to-earnings (P/E) ratio of just 8.2 times.

I think HSS has a tremendous opportunity to grow profits from this point on. It will benefit from the growing trend of people and companies renting equipment rather than buying it. A likely pickup in the construction market — boosted by the new government’s plans to turbocharge house building — will also give its profits a big push.

The 8.3% dividend yield on HSS shares provides an added bonus for value investors to savour.

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I already own shares in Topps, so may look to add further shares. However, I’d happily snap up some HSS shares when I next have some investable funds.

What do they do?

Topps is one of the largest tile and flooring retailers in the country, with an extensive retail presence.

HSS is one of the leading names in the construction equipment hire industry across the UK. It also possesses a strong retail presence throughout the country.

Why am I tipping these stocks to climb?

The construction sector has been under immense pressure in the past 18 months or so. This is linked to economic turbulence, including higher interest rates and inflation.

We’re now under a new government as of last week! This means certain economic issues are going to be prioritised to combat issues and push growth.

A few of these issues could translate into good news for Topps and HSS. Firstly, there are rumours that an interest rate cut could be just around the corner. This could spell good news for housebuilders, and as well as the property market in general.

Construction firms and homeowners may now be back in the market for flooring, as well as tool hire to tackle projects. This could boost both stocks’ share price, as well as earnings and potentially returns too.

The other greenshoot is the new government understanding the need to tackle the housing imbalance in the UK. Demand is currently outstripping supply. With inflation levels coming down, and a potentially more favourable housing market, demand for construction tools and flooring could see HSS and Topps benefit in the long run too.

My investment case

Starting with Topps, the bull case includes its extensive experience, and wide reach, as well as dominant market position.

In addition to this, a dividend yield of 9.2% has been pushed up by a falling share price, but it looks sustainable based on a decent looking balance sheet. However, I do understand that dividends are never guaranteed.

From a bearish view, competition in the tiling and flooring market is more intense than ever. As shopping habits have changed, online-only disruptors threaten Topps’ market presence. Plus, Topps has to consider the hefty expense that comes with renting, owning, and maintaining a large retail network. This could dent earnings and returns.

Moving onto HSS, the draws of buying some shares are similar to that of Topps shares. It’s rare to come across small caps that have been operating for many years, with lots of information readily available, a good market position, and decent growth prospects. The business opened 29 new merchants last year, and is looking to capitalise on greener pastures ahead for the construction industry. Plus, a forward dividend yield of over 7% is attractive too.

However, from a bearish view, the similarities with Topps continue. Aside from competition and retail outlets to worry about from a cost view, inflation could rear its ugly head once more, and cause private and commercial construction projects from going ahead. These aspects could hurt earnings, returns, and sentiment.

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These small-cap companies are often young companies with limited financial resources. What’s more, because they are at the beginning of their life cycle, they tend to reinvest any spare cash to boost growth. Dividends are a very distant consideration.

However, there are exceptions to this rule, a few of which are shown in the table below.

Of course, dividends are never, ever guaranteed. But if broker projections are correct, a £20,000 lump sum invested equally across these penny stocks would make me a £1,280 passive income this year alone.

There’s a good chance too that they could grow their dividends over time. Here’s why I think they’re worth a close look today.

HSS Hire Group

Construction companies across the globe are changing the way they operate. Rather than buying their own heavy equipment, many are choosing to rent instead in increasingly large numbers.

The advantages are numerous: the avoidance of large initial costs, no storage concerns or maintenance expenses, and better equipment tailoring for specific projects. It’s a trend that should benefit businesses like HSS going forwards.

This operator is expanding rapidly to capitalise on this trend as well. It opened 29 new builders’ merchants last year to take the total to 89. I think it could be a great buy despite current weakness in the UK economy.

Topps Tiles

Like HSS Group, building materials supplier Topps Tiles is also vulnerable to a subdued construction sector. It also faces significant competition from the likes of Kingfisher-owned B&Q and Travis Perkins.

But I still think earnings could surge given the bright outlook for UK homebuilding over the next decade. Britain needs to rev up residential construction to meet the needs of its growing population. Indeed, the Labour Party — favourites to win this week’s general election — has vowed to build 1.5m homes over the next five years.

This could support large and growing dividends from Topps Tiles for years to come.

Anglo Asian Mining

Copper miner Anglo Asian Mining hasn’t had the best of things more recently. Production has fallen sharply as it awaits regulatory approval for some of its operations. More specifically, it’s seeking the green light to raise a tailings dam wall.

The company isn’t out of the woods yet. But it received a positive environmental report from Azerbaijan’s government last month to carry out its work. Now could be the time to buy a stake in the company, then.

Copper miners like this have excellent long-term investment potential. Their product is used extensively in fast-growing sectors like renewable energy, computing, electric vehicles, and construction. And with supply shortages opening up, prices of the red metal are tipped by many industry experts to explode.

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Let’s take a closer look.

What’s happened

HSS is a leading rental and leasing business operating in the construction equipment sector. It operates out of physical depot locations up and down the country. It is open to DIY and trade customers, the latter being where most of its money is made.

So what’s been happening with HSS shares? As I write, they’re trading for just 7p. Over a 12-month period, they’re down 41% from 12p at this time last year.

Going back even further, they’re down 70% over a five-year period from 24p, to current levels.

A big reason for the recent drop has been economic volatility. Inflationary pressures, as well as rising interest rates, have hurt the property market, the house building market, as well as causing a cost-of-living crisis. This disastrous cocktail has resulted in mixed performance, as well as weaker investor sentiment.

Speaking of performance, the firm’s last update released last September, a half-year report for the six months ended 21 July, wasn’t all bad. HSS reported that revenue and operating profit increased, compared to the same period last year. However, margins and EBITDA were down. The good news was that there was an interim dividend. In fact, it was hiked compared to the last interim dividend.

What could happen?

The implications of a better economic picture are obvious, if you ask me, but not plain sailing. If volatility subsides, and the house building market can gain momentum once more, HSS could be primed to benefit. A big part of this for the business is the fact it has heavily invested in technology, its sales network, and boosted its partner program. Some of the results of this investment were clear to see in its last update.

Plus, the business has a good looking balance sheet at the moment too. This could help it stave off continued pressure at the moment.

If inflation comes down to expected levels in the coming months, and interest rates comes down, HSS could be in a better position for the future.

Would I buy shares?

There is definitely potential for recovery for HSS shares. Its profile, position, and the strength of its balance sheet are positive aspects. Plus, the housing imbalance in the UK offers it growth opportunities for years to come. Furthermore, a dividend yield of over 6% – albeit inflated due to a falling share price – is another plus point in my investment case.

However, I don’t think I’ll be buying any HSS shares for my holdings right now. Being at the mercy of economic headwinds to such a large extent is putting me off. There are better stocks out there that I could buy with my hard-earned money.

I will keep HSS shares on my radar for now, and might revisit my position once its next set of results come out.

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In 2024, the London Stock Exchange has no shortage of such shares. Following the recent market correction, valuations — especially among small-cap companies — have tumbled. But while this is undoubtedly frustrating, it may have also created buying opportunities among the companies that show plenty of potential.

With that in mind, let’s explore some of the more interesting propositions in penny share territory that might be worth watching closely.

A rising helium supplier

Shares of Helium One Global (LSE:HE1) have garnered a lot of attention from investors in recent years. And for good reason. The firm is engaged in helium gas exploration projects in Tanzania. And while it has yet to extract anything from the ground, the latest test results from its Itumbula West-1 site suggest that may change in the coming years.

In fact, the group could be sitting on top of one of the world’s most valuable helium sites. While the use cases for the gas are fairly niche, the lack of supply has made it valuable, especially within the healthcare and aerospace industries. An extended well test is planned for the third quarter of 2024. And if this delivers further positive results, Helium One will be another step closer to potentially becoming a critical global supplier of helium gas.

Of course, with all eyes on this test, a negative result or even a delay could be disastrous for the share price. So, investors will have to watch and analyse progress closely.

A rebound in homebuilding?

Higher interest rates slowing activity among the UK’s leading homebuilders and contractors have created several headwinds for HSS Hire (LSE:HSS). The tool & equipment rental enterprise has seen its growth and operating profits flatten, sending the penny stock in the wrong direction.

However, with mortgage rates and property prices falling, there are some early indicators of home buying demand slowly beginning to rise again. This could spark construction back into action. And with it, provide a far more favourable macroeconomic environment for HSS to get back on track.

While the group’s indebted balance sheet does limit its financial flexibility, leverage has been slowly getting more manageable. That’s why I think investors should be keeping an eye on this business throughout 2024.

Exploring nanomaterials

On the more cutting-edge side of things, Nanoco Group (LSE:NANO) has been making waves. The group specialises in cadmium-free quantum dots. These are tiny particles used in a variety of specialist industries, such as semiconductors and medical imaging.

Apart from winning a major legal battle against Samsung, the group has recently secured its first commercial contract as well as signing two joint development agreements — one of which is with STMicroelectronics. This has flooded the balance sheet with cash. And while at least £33m is earmarked to be returned to shareholders, Nanoco seems to be on track.

Of course, transitioning from a research- to a production-based business comes with its own set of challenges. But if the firm continues to hit impressive milestones, it may warrant a closer look from potential investors.

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But these three, I think, look like good value. And they might not stay that way for too long.

Property slump

When we think property slump, we think housebuilders. Or we maybe think estate agents, or REITs. But I also think about the humble brick, and that brings to mind Ibstock and Michelmersh Brick Holdings (LSE: MBH).

Michelmersh shares are under the £1 mark, but only just, and it’s the first of my penny share picks.

The price has gained a bit in 2023, and it might not be a penny stock for long. But that comes after a fall from a 2021 peak, and over five years it’s pretty much flat.

So are the shares really cheap? Well, the company seems to think so. It’s been on a share buyback since March. And that alone might be enough to push the price above 100p.

Results for 2022 showed a 15% rise in revenue. Adjusted profit before tax gained 17.5%, with earnings per share up 13.7%.

A long housing slump might hit demand in the next year or so. But it hasn’t caused much harm yet.

Lithium demand

The demand for lithium pushed a lot of stocks up in 2021. Most fell back, but I see Zinnwald Lithium (LSE: ZNWD) shares are taking off again in 2023.

They’re still down 20% in five years, at 13p, at the time of writing. It makes me think this might still be a good time to buy.

This carries the most risk of my three picks. And I’d say it might only be for those who like a bit of growth share thrill from time to time.

There’s no profit here yet, so that makes valuation tricky.

The key question is how much cash it might need before we see the first profit. We have just had a fundraising, so things seem liquid for now.

What draws me most to Zinnwald is it’s the kind of stock I think I’d have bought back when I was young and less risk-averse.

Equipment rental

HSS Hire (LSE: HSS) shares are down 40% in five years. But they started to pick up in April, so are we in for a bull run?

FY22 results just posted show gains across the board, with revenue up 10.7%.

That led to adjusted earnings per share (EPS) of 2.41p, more than double 2021’s figure. On a share price of 13.5p, as I write, that’s a price-to-earnings (P/E) ratio of just 5.6.

The 0.54p dividend for the year means a 4% yield, and that looks strong. Analysts expect more growth in the next few years too.

On the face of it, HSS looks good. But it’s in a tough market right now, and and we can’t yet tell how the firm’s turnaround will go in the next few years. On what I see though, it looks cheap.

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Yet, every once in a while, one of these companies finds a way. And suddenly a teeny-tiny business can become a giant. I may have found such an opportunity today. Its shares collapsed during the pandemic, but they could be in for an impressive comeback.

A turnaround penny stock?

Investing in an equipment hire business is hardly the most exciting idea out there. Yet HSS Hire (LSE:HSS) might soon display an explosive performance for patient investors.

As a reminder, this company lends out tools & equipment while also providing support services to over 32,000 customers in the UK. It predominantly caters to construction tradespeople, who don’t necessarily have the capital to buy expensive machinery. And for those that do, many still choose to rent to avoid all the costs of testing, maintenance, and distribution.

In 2020, the pandemic struck. Multiple lockdowns saw construction projects grind to a halt, and the demand for equipment rental evaporated with it. Unsurprisingly, the group’s revenue saw a double-digit decline, and profitability went out the window with a reported £4.7m operating loss. Subsequently, the penny stock went from trading at 26.7p to 14.3p today.

Back to black

But is all that about to change? Earlier this year, management released its preliminary results for 2021. And despite the share price staying in penny stock territory, things seem to be going very well, in my opinion.

Revenue across the board jumped by double digits, climbing back to 92% of pre-pandemic levels. According to a recent trading update, this top-line growth has continued over the last six months. But the bottom line is where the real magic is happening.

Following the disruptions from Covid-19, management executed a major structural overhaul of the business. Some 134 stores were permanently shuttered, revamping the operating model to rely more heavily on technological solutions. I think it’s fair to say the plan worked. Why? Because the Return on Capital Employed (ROCE) surged from 10.7% to 22.1%. Consequently, operating profits for 2021 came in at a record high of £34.5m!

Time to buy?

HSS Hire’s performance is undoubtedly impressive. But I do have some reservations about this still-penny stock. The rental equipment sector doesn’t exactly have high barriers to entry. And, unfortunately, that means the group’s rental fees are constantly under competitive pressure.

It’s also worth noting that the firm has just under £79m of debt maturing in the next five years. This is a drastic reduction from the £240m due just a year ago. However, with interest rates rising, these financial obligations could eat away at its newfound profitability.

Nevertheless, with a market capitalisation of only £100m, I can’t help but feel this opportunity is too good to miss for my portfolio.

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Penny shares for growth

The first company on my list is N Brown (LSE: BWNG). I am wary of investing in the retail sector in general because of the ongoing shift from physical to online retailing.

However, N Brown is now a pureplay digital retailer. I think this gives the company an edge in the competitive retail landscape, although it is not immune from sector competition. 

After a rough 2020 and 2021, where sales declined more than 20%, analysts expect growth to return in 2022. Based on current growth projections, the stock is selling at a forward price-to-earnings (P/E) multiple of around 6. That looks cheap compared to the industry average, which is around 12 to 14. 

Based on this valuation and the company’s competitive advantage, I think the stock could increase in value over the next few years as growth returns. 

Unfashionable industry

Unfashionable sectors tend to be good places to hunt for discount shares. Smiths News (LSE: SNWS) is a great example.

The newspaper and magazine distributor operates in a slow and steady unfashionable industry, which is nowhere near as exciting as some of the hot sectors of the market like technology. 

Still, the company does provide an essential service, and after the disruption of the pandemic, it looks cheap. While revenues are expected to decline over the next two years, efficiency initiatives will help it improve bottom-line growth, according to City analysts. 

Based on these projections, the stock is selling at a forward P/E multiple of just 4. This makes the company one of the cheapest penny shares on the market. 

That said, I am under no illusion newspaper distribution is a declining business. Profit margins are also razor-thin, leaving no room for error.

These are the biggest challenges the organisation faces. Nevertheless, I do not think it will take much for the market to reevaluate the stock and its potential. This could lead to a substantial increase in the company’s share price. 

Construction sector growth

The final company I am highlighting is tool and equipment hire business HSS (LSE: HSS). There are two reasons why I like this business right now. First, the construction sector in the UK is booming, which could provide a solid tailwind to support the group’s growth in the years ahead. 

At the same time, the company is starting to reap the benefits of a multi-year transformation plan. City analysts believe the firm could report a net profit of £4m for the 2021 financial year, thanks to these twin tail winds. To put this into perspective, over the past six years, the corporation has lost a total of £130m. 

Based on analysts projections, the shares are trading at a 2022 P/E of 6.2.

The most significant danger here is the risk the company could go back to its old ways. If costs rise significantly and the construction market starts to stagnate, losses could return. 

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