There’s a wealth of cheap UK shares available even to those with only a small amount of money to invest.

Smiths News

The first share to consider is Smiths News (LSE: SNWS), a small (£140m) outfit that generated around £1.1bn in revenue over the past 12 months. The company provides services in the sale, marketing and distribution of newspapers and magazines.

The shares look cheap at just 59.4p, backed by a forward price-to-earnings (P/E) of just 5.79 — attractive to value investors. On top of that, they have a high dividend yield at roughly 8.8% and with a payout ratio of only 45.3%, they’re well covered.

In recent updates the business reported adjusted operating profit up 3.2% in H1 2025 and free cash flow increasing. It also secured contracts covering 91% of its publisher revenue streams through to at least 2029, which lends medium-term stability.

However, there are key risks. Margins remain thin and earnings are weak given the decline in traditional print media. Even the digital ad revenue side is under pressure from artificial intelligence (AI)-driven changes in the advertising landscape. Debt is reducing but the business remains exposed to structural decline in its core markets. An investor should weigh up those risks against the high yield.

So while Smiths News offers a compelling income play with a cheap valuation, it depends on the company maintaining relevance in the shrinking print and magazine industry.

Reach

Another contender is Reach (LSE: RCH), also in news media and publishing. The shares trade at around 61.2p each with a shockingly-low forward P/E of 2.58.

The yield is an eye-watering 12% but the payout ratio is still low, at roughly 46.4%. Plus, it has an 11-year-long payment track record and sufficient cash coverage to support payments.

On the surface, this looks like a very high income-yielding play with value appeal.

Nevertheless, the risks are significant. Revenue is forecast to continue declining for the next three years as print falls away and digital ad markets evolve rapidly. The company’s ability to succeed under a new paradigm of AI-driven advertising is uncertain.

If Reach can’t transform its business model effectively, the dividend payments may come under pressure. Also, its sector faces structural challenges which could erode long-term viability.

Thus, while Reach may look like an excellent high-yield cheap share to consider, an investor must recognise the real possibility that dividends might be cut or growth stalled.

The bottom line

For investors keen to grab some cheap shares with high yields, Smiths News and Reach both make excellent value plays worth considering in the dividend shares space. They offer strong income potential and attractive valuation metrics.

But the caveat is clear: both sit in a news-media and print distribution sector under significant structural pressure from digital disruption and AI-driven advertising changes.

So while the yield stories are compelling, the business models face headwinds that must be weighed carefully.

In short, these dividend shares could be part of an income-focused portfolio strategy, but should only be considered with both the yield and the broader sector outlook in mind.

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US investors tend to be enthusiastic and that often leads to high-looking company valuations. But when the S&P 500, Nasdaq and the Dow Jones Industrial Average all ease, it’s like they’re letting off steam and reducing the over-valuation pressure.

Lacklustre UK markets

Meanwhile, there hasn’t been much of a Santa Rally for the UK stock market. The FTSE 100 and FTSE 250 have been doing what they often do well — move broadly sideways!

We British seem so reserved and often focus intensely on company valuations. Perhaps that approach tends to reduce the number of speculative bubbles blowing up this side of the Atlantic.

Many UK companies still look like they have modest valuations. So that’s the main reason I’m not waiting for any stock market crash to arrive. Some shares appear to be on sale now, so I’ve been working on building my watchlist.

For example, TP ICAP (LSE:TCAP) in the FTSE 250 looks cheap against several valuation measures. But I’m most impressed by the chunky dividend. With the share price in the ballpark of 260p, the forward-looking yield for 2025 is around 6.2%.

There’s a multi-year record of dividend rises backing up that high shareholder payment. The financial company lowered the pay out in 2020 when the pandemic struck, but it’s come roaring back since.

However, financial firms are known for their cyclicality and that adds risks for shareholders. TP ICAP operates as an inter-dealer, energy and commodities broker. On top of that, it’s provides over-the-counter (OTC) pricing data. So it’s facilitating transactions between various financial institutions.

Meeting and exceeding expectations

The setup makes the business sensitive to economic shocks and trends. It’s also affected by currency volatility. The earnings record shows how the fortunes of the business cycle up and down. Prior to 2022 there was a series of annual declines.

Nevertheless, in November a positive third-quarter update arrived and the directors said trading had been in line with expectations. City analysts are expecting single-digit percentage increases for earnings and the dividend this year and next.

For the time being, the business looks settled and is advancing steadily. So I see the stock as well worth my further research and consideration time now.

But it’s not the only company in my gaze. Another on my watchlist is Smiths News (LSE:SNWS). With the share price in the arena of 63p, the newspapers and magazines wholesaler looks cheap against valuation indicators. For example, the dividend yield’s above 8%.

However, the industry’s been in decline and this is no fast-growth proposition. So there are risks. 

Nevertheless, November’s full-year report featured modest results ahead of market expectations. Chief executive Jonathon Bunting described the firm’s news and magazine business as “resilient”. On top of that, cost efficiency initiatives have been paying off.

Bunting thinks Smiths News is well placed to deliver a resilient performance over the medium term. So I think the company deserves its place on my watchlist and is due sharp focus and consideration right now.

The post I’m not waiting for a stock market crash, these shares are on sale now! appeared first on The Motley Fool UK.

Here are two I think are worth serious consideration today:

Dividends are never, ever guaranteed. But if broker forecasts prove accurate, a £15,000 payment invested equally across these shares will generate a £1,298 in passive income.

But what makes them potentially attractive investments?

Read all about it

Smiths News is a major distributor of newspapers and magazines in the UK. It’s been doing so for 200 years, but as the world turns digital, the threats looking ahead are obvious.

Latest results showed revenues and operating profit tumbled 1.9% and 7.8% respectively in the first half. But on the plus side, a combination of price hikes and cost-cutting is helping to take the sting out of falling circulations.

There are some other reasons to be optimistic too. Smiths News is diversifying into other areas to offset the threat to its traditional business. It’s expanding its distribution operations, and currently delivers products to supermarkets and convenience stores.

The company also launched a waste recycling business early last year and is making good progress in this area. It now has 5,000 subscribers on its books.

Despite that first-half profits drop, Smiths raised the interim dividend 25% year on year. This was thanks to a refinancing agreement that helped the business lift a £10m cap on shareholder payouts. A halving in net debt in the period could set it up to continue growing dividends too.

This is undoubtedly a high-risk share. However, a forward price-to-earnings (P/E) ratio of 5.9 times suggests it could be worth the gamble.

Property giant

Supermarket Income REIT may be considered a safer pick right now. As its name implies, the company gives investors a chance to capitalise on the ultra-defensive food retail segment.

What’s more, it lets properties to the country’s largest supermarket chains like Tesco and Sainsbury’s, providing earnings with even more stability.

It explains why Supermarket Income collected 100% of the rents it was owed in the first half.

This robustness also makes the company an effective source of dividend income over the long term. And so does its classification as a real estate investment trust (REIT). Under REIT rules, the business must pay at least 90% of annual rental profits out to shareholders.

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.

That’s not to say Supermarket Income doesn’t have its challenges. If interest rates fail to fall significantly, the value of its portfolio will remain under the cosh.

But on balance, I think it could be a great low-risk buy for investors to consider. And what’s more, at current prices, it also looks dirt cheap. According to Hargreaves Lansdown, it trades at a 19% discount to its net asset value (NAV) per share.

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Three stocks that flagged up as potential additions to my portfolio are Paragon Banking Group (LSE: PAG), Smiths News (LSE: SNWS) and Alumasc Group (LSE: ALU).

These three options deserve a closer look, and here’s why!

Some background (and risks)

Paragon Banking Group is, unsurprisingly, a bank. In 2024, the economy might not grow very quickly, and interest rates could be high. This, combined with the ongoing high cost of living, will make things tough. It will be similar to 2023 in terms of uncertainty, but each year has its own difficulties. Financial companies will need to adjust to pressure from different factors.

Smiths News is a distributor of newspapers, magazines, books and consumables. Management has raised caution that revenues may fall 3-5% in the medium term. But the company’s large market share and history of cutting costs well make the revenue issue just a small one, in my opinion.

Alumasc Group is a UK-based supplier of building and engineering products. As well as grappling with ongoing inflation, the industry is facing increased volatility in material prices. I think this poses as the biggest threat to the industry in 2024.

The metrics

“The higher the dividend yield, the better.” Not so fast! Many beginner investors searching for passive income can fall into the trap of this thinking. A high dividend yield is nice, but there are other factors to consider.

Therefore, I use a few filters to find dividend shares that could be great contributors in the long term. The first of which is looking at the share-price increase over the last 12 months.

If a share price falls dramatically, the dividend yield will increase significantly. However, the increase is not due to strong underlying fundamentals. In fact, it’s likely the opposite: weak fundamentals. Therefore, I look to avoid artificially high yields.

From my three selected companies, the 12-month performance is:

Alumasc: +11.2%
Paragon Banking Group: +29.3%
Smiths News: +1.0%

The second filter is focused on the company’s three-year free cash flow. Free cash flow is a key metric that helps a business function day to day, and supports income payments to investors without hampering operations.

To meet my criteria, a company has to have this metric above 10%. The figures are as follows:

Alumasc: 13.4%
Paragon Banking Group: 32.0%
Smiths News: 32.7%

The final part of my criteria is the dividend history. I want to find companies that aren’t stalling in dividend payments, but rather are growing them over the past few years.

All three companies tick this box. Their dividends are in line with or higher than their five-year average.

I’ll also add a fourth metric to the mix, because you may be wondering about this one. I look for a trailing 12-month (TTM) dividend yield above 4.5%.

The TTM dividend for my basket of dividend stocks is 6.4%. Smiths News leads the way with 8.8%, Alumasc with 6.0% and Paragon with 4.5%.

The post £10,000 in savings? Here are 3 stocks I’d consider to earn passive income appeared first on The Motley Fool UK.

Of course, the flipside of this also applies. Smaller companies may be less well established and more likely to run into financial difficulties.

The two companies I’m looking at today are both relatively small, but they’re profitable and have sound finances, in my view. I think they could both be good investments over the next three to five years. Here’s why.

Value price, quality business?

Car sales group Vertu Motors (LSE: VTU) has 188 franchised dealerships across the UK, with a focus on premium brands such as BMW, Jaguar Land Rover and MINI.

Admittedly, the UK car market is expected to slow this year. But recent trading has been strong and I think Vertu’s forecast price-to-earnings (P/E) ratio of six already reflects a cautious outlook.

Another attraction for me is that the group owns the freehold for many of its dealerships. This means there’s plenty of asset-backing for the share price. If the business runs into trouble, freehold property can usually be used to raise cash.

Vertu’s most recent accounts showed tangible assets of 71p per share, compared to a share price of 56p. The recent acquisition of dealer group Helston Garages means that these figures will have changed slightly, but I think the balance sheet should still be very strong.

What could go wrong? This business has a decent market share and I think it’s well managed. But if the UK suffers a severe recession, profits could fall much further than expected. If that happened, the shares could fall further and the dividend could be cut.

As things stand today though, I think Vertu looks decent value. I reckon this penny stock could perform well in an economic recovery.

Delivering good news

My second pick is distribution group Smiths News (LSE: SNWS). This company has an overnight delivery network that’s used to deliver newspapers and magazines to retailers.

There’s an obvious risk with this business — printed newspaper and magazine circulation is falling steadily. However, according to Smiths the decline is fairly steady and predictable. So far, the company has been able to adjust its network each year to stay profitable at lower volumes.

The long-term uncertainty surrounding this business is reflected in a super-low valuation. Smiths News currently trades on just five times forecast earnings, with a well-covered 7% dividend yield.

The risk is that at some point, someone will probably need to find a new use for the group’s overnight network. Otherwise it could become unsustainable.

Despite this, the next few years seem pretty safe. Smiths has already secured long-term contracts for 46% of its newspaper and magazine revenue. A recent deal with Telegraph Media Group runs to 2029, for example.

If the dividend is held, then the 7% yield would provide a 35% return in five years, even if the shares don’t move.

I wouldn’t bet the farm on this stock, but I think it probably offers a good opportunity at current levels.

The post 2 penny stocks to buy and hold for the next five years appeared first on The Motley Fool UK.

Newspapers and magazines

It is worth remembering that a penny stock is one that trades for less than £1. Smiths News is a UK-based wholesale distributor of published content such as magazines and newspapers.

So what’s happening with Smiths shares currently? Well, as I write, the shares are trading for 32p. At this time last year, the shares were trading for 38p, which is a 15% drop over a 12-month period. Many stocks have pulled back since the turn of the year due to macroeconomic headwinds and the tragic events in Ukraine.

The bull and bear case

Let’s start with some positives first. I noticed that Smiths has an over 50% share of the market in the UK for the distribution of newspapers and magazines. This significant advantage over competitors should allow it to perform consistently and offer generous returns.

Looking at Smiths’ fundamentals, it does just that. Firstly, the shares offer a dividend yield of over 7%. This is rare in a penny stock and Smiths yield is higher than the FTSE 100 average of 3%-4%. I am aware that dividends can be cancelled at any time, however. Furthermore, Smiths shares look dirt-cheap on a price-to-earnings ratio of just three at present levels.

Although performance remains consistent over the past few years, revenue and profit has been falling slightly — but more on that in a moment. I note that Smiths has undertaken massive cost-cutting exercises to continue being profitable and generating healthy volumes of cash. This could also result in further dividends.

So to the negatives then. Smiths operates in an industry that is declining due to the rise and popularity of technology. Many of us access news, magazines, and much more on smartphones and other devices. The traditional paper and its volumes are declining. This is reflected in its declining performance noted above. Smiths knows this too which is why it is cutting costs due to falling demand.

I believe the eventual decline towards minimal levels of newspapers and magazines that need distributing will hamper Smiths business. This will impact performance, returns, and investment viability. This is a concern for me as I like to invest for the long term.

A penny stock I’d avoid right now

Based on my investment strategy of buying stocks for the long term, I’m not convinced that Smiths News is right for me and my portfolio. I think the eventual shrinkage of the magazine and newspaper business will see Smiths shares fall by the wayside.

The only way Smiths could continue its current momentum is if it finds an alternative way to make money and boost growth and performance. I would not buy the shares today, but will keep a keen eye on developments.

The post Here’s 1 cheap penny stock with an attractive dividend yield. Should I buy shares? appeared first on The Motley Fool UK.

I’ve been hunting for potential bargains and have found five stocks I’m interested in adding to my portfolio in 2022.

I reckon all of these unloved shares look good value and could deliver big gains over time. But there are no guarantees. Sometimes there’s a good reason why a share is cheap. Problems may be lurking in the background. The business may be losing key customers.

The share prices of smaller companies also tend to be more volatile than larger stocks. Losses (and gains) can be very sudden. For these reasons, I wouldn’t ever invest in penny shares with money I couldn’t afford to lose.

I reckon this share could double

My first pick is a business I’ve been following for some years. I reckon now could be the time to buy. Gulf Marine Services (LSE: GMS) owns a fleet of offshore drilling rigs hired out to customers in the Middle East and elsewhere.

Gulf Marine’s fleet is very modern, but this led to a problem. The company had funded its fleet expansion with debt. By 2016, net debt had topped $400m, but the oil market crash in 2015 had caused demand for hire rigs to slump.

However, the business is under new management, reporting regular contract wins and improved fleet utilisation. Importantly, debt has started to fall.

Gulf Marine shares currently trade on just 3.5 times 2022 forecast earnings. This reflects the company’s high debt load. But if debt continues to fall, then I think the shares should re-rate to a more normal valuation.

This is still a risky situation. Debt is still very high and the current boost from high oil prices may not last. But if trading remains good, I think Gulf Marine’s share price could rise strongly from current levels.

Can this quality business keep growing?

My next pick is quite different. Currency specialist Record (LSE: REC) provides services to clients who need to manage their foreign exchange exposure. It’s a highly profitable business, with an operating margin of about 30%.

The problem is that growth has been pretty weak in recent years. Between 2017 and 2020, profits were broadly flat.

Newish chief executive Leslie Hill has brought in some fresh ideas and seems to have restarted the group’s growth. Revenue rose by 38% to £16.3m during the six months to 30 September, while pre-tax profit doubled to £5.2m.

I don’t expect this rate of improvement to be maintained, but broker forecasts suggest Record’s earnings could rise by 20% in 2022. In the meantime, the group’s balance sheet looks rock-solid to me, and the stock boasts a generous 6% forecast dividend yield.

Record looks good value to me at current levels. I’d consider buying this penny stock for income and growth.

Still going strong after 157 years

Investing in old companies isn’t a guarantee of success. But, in my experience, businesses that have been trading for more than 100 years often have some attractive qualities. Renold (LSE: RNO) is one such firm. This business specialises in industrial chains and gearboxes — technology it’s been developing and perfecting since 1864.

Growth hasn’t always been in a straight line. Major customers in the mining and construction suffer cyclical slumps from time to time. Demand for some products has changed over the years. I suspect the shift to electric power and renewable energy will create fresh challenges.

Renold’s revenue and profits have fallen over the last two years, in part because of the pandemic. However, half-year figures for the six months to 30 September suggest the business has returned to growth. Revenue for the period rose by 17% and adjusted operating profit was 41% higher.

Broker forecasts suggest this growth should continue into 2022/23. With Renold shares trading on just eight times forecast earnings, I’d be happy to buy the shares for my portfolio.

A special situation with a 6% yield

Newspaper and magazine distributor Smiths News (LSE: SNWS) is in a special situation. The company’s valuation reflects this — the shares currently trade on just four times 2022 forecast earnings and offer a 6.3% dividend yield.

If this was a healthy, growing business, I’d probably expect a P/E of 8-10 and a yield of 3-4%. The problem is that printed newspaper and magazine sales are in long-term decline. These days, this stuff gets published online.

However, Smiths News has a 55% share of the remaining market. This makes it big enough to be profitable and cash generative.

The company says it already has plans to cut costs to match falling volumes. Brokers who cover the stock have bought into the story. They expect earnings to rise by 3% next year, pricing the stock on 3.9 times forecast earnings. Another chunky dividend is expected, indicating a potential yield of 6.3%.

The main risk I can see is that the business will keep shrinking unless management finds new markets for Smiths’ distribution services. At some point, which is hard to predict, this shrinkage could start to threaten the company’s viability.

My view is that there’s probably an opportunity here. For this reason, I’d be happy to open a small position in Smiths News today.

A penny stock turnaround?

Doorstep lender Morses Club (LSE: MCL) is expanding steadily into online lending and banking. The company focuses on customers with bad credit ratings, providing loans and pre-paid debit cards.

The pandemic caused revenue and profits to fall sharply, but Morses now appears to be on the road to recovery. The group’s loan book rose by 8.5% to £60.3m during the six months to 28 August, while pre-tax profit for the period rose from £2.3m to £2.6m.

This business will face ongoing regulatory risks, in my opinion, as I expect the rules on bad credit lending will continue to tighten. The impact of this could be that Morses’ profitability will be lower in the future.

Even so, Morses Club has a successful track record in this sector and a significant share of the market. Profits are expected to rebound in 2022/23, leaving the shares on just six times forecast profits. At this level, I see this penny stock as a potential buy.

The post 5 penny stocks I’d buy for 2022 and beyond appeared first on The Motley Fool UK.

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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Here are three I’ve found that I’d buy for my portfolio today.

Under-the-radar growth

My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m business is one of a handful of companies that’s disrupting the currency services offered by banks by providing cheaper and faster services.

Argentex doesn’t serve the holiday travel market. Instead, the firm targets higher-value customers with more sophisticated requirements, such as institutions, companies, and high net worth individuals.

This is still quite a small business, but growth has been strong so far. Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit jumped 22% to £3.3m. The main risk I can see is that this is an increasingly competitive market. Argentex’s profit margins have fallen over the last 18 months, cancelling out some of its growth.

However, I think the risk of slowing growth is already priced into the stock. Argentex shares are trading on just 12 times 2022 forecast earnings and offer a 2.5% yield. This is a growth stock I’d be happy to buy for 2022.

This turnaround is delivering results

My next pick is industrial chain specialist Renold (LSE: RNO). Unlike Argentex, this British firm is more than 100 years old. Renold makes chains and related parts used for machinery such as cement mixers, conveyor belts, escalators, and train doors. It’s one of the oldest companies in this market. Renold’s products sell all over the world.

This business has been through a difficult patch over the last few years, but now seems to be back on track. The company’s adjusted earnings are expected to rise by a chunky 79% this year, as the turnaround kicks in.

If Renold delivers on this forecast, I think the stock looks quite cheap on just nine times forecast earnings. My only serious concern is that this business still has a sizeable £100m pension deficit. This requires cash contributions of around £5.5m each year.

I’d want to keep an eye on the pension situation. But Renold is certainly a penny stock I’d be happy to own.

Too cheap to ignore?

The last share I’m going to look at is currently priced at just four times 2022 forecast earnings. The shares are also expected to provide a chunky 6.7% dividend yield in 2022.

The company concerned is Smiths News (LSE: SNWS), which delivers newspapers and magazines to shops all over the UK. The company has a 55% share of the market and has been in business over 200 years.

I’m sure you’ve spotted the obvious risk here — sales of printed newspapers and magazines have been falling for years as readers move online. My guess is that this trend will continue.

This decline is an ongoing challenge for Smiths, but the company’s big market share means that it still handles enough volume to make money. Cash generation is good, and Smiths’ debt levels have been falling fast.

I think this penny stock is probably too cheap at current levels. For this reason, I’d be happy to add Smiths News to my portfolio today.

The post 3 top penny stocks to buy for 2022 appeared first on The Motley Fool UK.

But things haven’t worked out so well in recent times. The shares topped at around 250p in 2014, trod water for the next three years, and crashed in 2018. The pandemic wasn’t kind to the stock either, and in 2020 the share price bottomed at 11.5p. That’s a 95% plunge!

But things have picked up recently, and the shares have rebounded to 40p. I think there might still be some value here.

A successful turnaround  

Smiths News released its full-year results last week that showed earnings grew by 11.3%. Free cash flow also rose by a highly impressive 120%, and dividends are being restored after they were halted last year due to the pandemic. Even better was that management said the overall performance was ahead of expectations. 

Another good thing about the business is its high return on capital – the metric used to gauge how efficient a business is at generating profits with both debt and equity capital. It has been consistently in double-digits. I take this as a sign that the business is a quality operator.

But there’s a turnaround story playing out here. In April last year, Smiths News decided to sell Tuffnells (the green van-owning parcel delivery company) after a strategic review. Now the company is able to focus on its main distribution business, and it has brought down its cost base.

There has also been a reshuffle of the management team at Smiths News, with a new chairman and CEO coming on board.

Debt is the issue 

What about the stock’s valuation? Well, the shares trade on an incredibly cheap price-to-earnings (P/E) ratio of just four. But there’s a reason for such a low P/E that I have to remember

In the results last week, net bank debt (the worst kind) was £53.2m. The company’s market value is only just under £100m, so this is significant.

However, Smiths News was able to refinance this debt at the end of 2020 with a syndicate of banks, giving breathing room for now. If trading deteriorates though, and cash generation dries up, this will be a huge problem.

When companies have high debt, I like to use a debt-adjusted P/E to take into account the extra risk of buying shares in such a business. For Smiths News, this is still an incredibly cheap 6.5.

The bottom line

With a new strategic direction, fresh leadership and more efficient operations, shares of Smiths News might only just be starting a charge back to 250p. That would be a return for my portfolio of 525% based on a share price of 40p! But my concern is the large debt load. If the cash generation stays high, and we avoid another lockdown, I might just buy this penny stock for my portfolio.

The post Here’s a ridiculously cheap penny stock to buy today! appeared first on The Motley Fool UK.