A penny stock I’ve been watching recently is Michelmersh Brick Holdings (LSE: MBH). Is it now a good time for me to buy some shares? Let’s take a closer look.
Bricks and mortar
As an introduction, Michelmersh manufactures and sells handmade and machine made clay bricks and roof tiles. It operates out of its own landfill site in Telford, England.
It is worth remembering that a penny stock is one that trades for less than £1. As I write, Michelmersh shares are trading for 89p. At this time last year, the shares were trading for 90p, which is a 1% drop over a 12-month period.
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The investment case
There are a couple of glaring bullish traits Michelmersh possesses for me. To start with, it operates in the premium brick market. The positive here is that builders are looking for the best products and specific types of bricks. They are often willing to pay a little bit more for the product they need for their project. Michelmersh owns many of the UK’s premium brick brands currently, which should help boost performance and returns.
Next, although not the most exciting product in the world, bricks are in high demand, especially in the UK. This is because of a chronic housing shortage and the race to build new homes. The other thing to bear in mind here is that the shortfall in UK bricks has meant many builders have turned to imports, but importing bricks is an expensive task so builders would like to avoid this.
Both of these traits help me believe Michelmersh is in a good position in terms of demand as well as growth prospects.
Moving onto some fundamentals, Michelmersh already pays a dividend. Its dividend yield stands at 4.7%. This is above-average for a penny stock. I do understand that dividends are never guaranteed. In addition to this, the shares look decent value for money on a price-to-earnings ratio of just nine.
Finally, Michelmersh has a strong balance sheet at present. This includes a good level of cash reserves. This is positive as it can help the business during tough economic times as well as help with growth initiatives.
Moving to the bear case, Michelmersh could experience some short-term performance issues due to current economic volatility. Due to rising costs and interest rates, demand for bricks may slow down as construction could slow. Furthermore, rising costs can often impact profit margins, which tend to underpin returns and growth.
A penny stock I’m buying
After reviewing the bull and bear case, I’ve decided to buy a small number of shares in Michelmersh imminently. The passive income opportunity, value of the shares at present, as well as growth potential helped me make my decision.
I am conscious Michelmersh is at the mercy of some short-term headwinds due to the current macroeconomic picture but I invest for the long term so would be willing to ride this period out. I expect to see long-term returns and share price growth.
