A cheap penny share this Fool doesn’t think will stay below £1 much longer!

Looking for low-cost, small-cap stocks to buy? Royston Wild thinks this could be one of the hottest penny shares on the UK stock market today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian woman with pink her studying from her laptop screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in penny shares is a high-risk but potentially high-reward trading strategy. It isn’t suited to novice investors, or those not willing to put their capital in danger. But experienced traders who can handle volatility can enjoy great success in trading these small-cap stocks.

For a company to qualify as a penny stock, we at The Motley Fool believe it must meet two criteria. In addition to trading below £1 per share, it must also have a market capitalisation below £100m.

Michelmersh Brick Holdings (LSE:MBH) is one great UK share I don’t think will be a penny stock for long. It trades at 94p per share and has a market-cap of £88.1m.

Up and down

Building materials supplier Michelmersh has been dipping in and out of penny share territory more recently.

Strong share price gains during autumn lifted it above the £1 per share mark in late 2023. But receding hopes of imminent interest rate cuts pulled the Alternative Investment Market (AIM) share back below this threshold in early 2024.

Higher rates are having severe implications for brickmakers by pushing mortgage rates up. This has caused demand for newbuild properties to sink of late as buyer appetite has dried up.

Strength in depth

But Michelmersh has remained remarkably resilient despite these troubles. Organic revenues rose 10.3% in the six months to June, while pre-tax profits edged 7.1% higher year on year.

And encouragingly, the business told the market in November that trading had remained “resilient” in the final quarter of 2023.

This toughness is thanks in part to the company’s diverse range of end markets. As well as supplying the newbuild home market, Michelmersh supplies large amounts of product to the repair, maintenance and improvement (RMI) sector, commercial regeneration, and social and specialist housing segments.

Green shoots

With signs of recovery emerging in the housing market, I think a re-rating of the penny stock’s valuation could be coming.

A string of major housebuilders including Persimmon, Taylor Wimpey and Barratt Developments have all announced improved sales in recent months. This comes as Halifax recently announced average home prices rose for their fifth straight month in February.

And with the Bank of England still expected to cut rates this year, the housing sector outlook remains largely encouraging.

City analysts certainly believe that Michelmersh’s share price is about to spring higher. The three brokers with ratings on the stock have slapped an average 12-month price target of 1.55p per share. One analyst even thinks the firm could almost double in value, to 1.8p per share, in the next year.

A cheap penny share

I believe that Michelmersh’s low valuation leaves plenty of scope for a price re-rating too. The City thinks earnings will rise 9% year on year in 2024, meaning the firm trades on a forward price-to-earnings (P/E) ratio of just 9.2 times.

This is a penny share I’d consider buying to hold for the long term. I expect demand for its bricks to rise strongly over the next decade (perhaps longer) as measures to tackle the UK’s housing crisis heat up.

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.

Royston Wild has positions in Barratt Developments Plc, Persimmon Plc, and Taylor Wimpey Plc. 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »