2 penny stocks to consider buying in 2024

Buying cheap shares in good quality, profitable businesses could be a good strategy for 2024, says Roland Head. Here are two penny stocks on his own radar.

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Recent months have seen a regular stream of takeovers at the smaller end of the UK stock market. Private buyers seem to think that many UK small-caps look cheap. I agree, which is why I’ve been hunting for buying opportunities among unloved penny stocks.

Today I want to look at two companies that are on my watch list as possible buys for 2024.

Quality brands going cheap?

My first choice is AIM-listed construction materials group Michelmersh Brick Holdings (LSE: MBH). This brickmaking business owns a collection of premium brands producing a range of specialist bricks and related products.

I think this premium focus differentiates Michelmersh from larger UK brickmakers, which tend to produce mass-market, standard products.

Customers choose specific Michelmersh brands for prestigious projects and are happy to pay a little extra – they don’t want standard, generic bricks.

Its latest trading update seemed encouraging to me. Management admitted that “contraction in the construction industry” has created more difficult conditions. But it said the “diversity of our customer base and [our] broad product channels” are helping to support a quality order book.

Importantly, Michelmersh is said to be trading in line with expectations. Unlike some rivals, the company hasn’t needed to cut its profit guidance this year.

The main risk here is that the current construction slowdown will become longer or more serious than expected. Brickmakers have quite high costs and if Michelmersh is forced to make significant cuts to production, then profits could be hit.

I can’t rule out that risk completely. But I’ve followed Michelmersh for a while and my impression is that it’s very well run, with experienced management. They’ve been through tough times before.

In the meantime, it looks cheap to me. The shares currently trade on around nine times 2024 forecast earnings. There’s also a 4.9% dividend yield that should be covered twice by earnings.

I see Michelmersh as a decent possible buy at current levels, as part of a balanced portfolio.

A penny share with a 6%+ yield

My second choice is currency management specialist Record (LSE: REC). This £147m business boasts 30% profit margins and a track record of strong cash generation. At the last update, the company was managing $84.5bn of currency exposure for its clients.

However, Record shares have fallen out of favour with investors this year, perhaps because of slowing growth in the business.

This share price slump means that shareholders are set to benefit from a forecast dividend yield of 6.6% for 2023/24. I think the shares probably offer good value at this level.

My main concern is that Record has struggled to deliver consistent growth in recent years. The company is now expanding into other areas of asset management in a bid to expand, but it’s not yet clear to me how successful this will be.

Even so, I think these risks are priced into Record shares at current levels. The group’s core business looks strong to me, and I don’t see much risk to the dividend next year.

In my view, this is a good quality business at a very reasonable price and worthy of further research.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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