A penny stock’s a share that’s trading for less than £1 with the underlying company sporting a market capitalisation of less than £100m. They’re generally considered riskier investments as companies meeting this definition are usually smaller and in the earlier stages of growth.
However, those who invest in penny shares typically do so because they believe they’ll be compensated more if the company becomes successful. And with a share price of 37.4p and a market-cap of £72.7m, Topps Tiles (LSE:TPT) is an example of a UK penny stock.
Let’s see how much £5,000 invested in it a year ago would be worth now.
A year of disappointment
Over the last year, Topps Tiles shares have fallen by 17.26%. Therefore, a £5,000 investment’s now worth only £4,137 today. Investors would have lost £863.
This is just a snapshot of a broader decline over the long term. Investors who put money into its shares five years ago would have lost 52.1% of their investment. For context, our £5k would only be worth £2,398 today, representing a loss of £2,602. That’s over half the value gone.
So why has this happened? Well, it’s easy to see from the company’s recent results.
Group revenue declined by 4.1% to £252m in 2024. Moreover, the firm flipped from a profit before tax of £6.8m in 2023 to a £16.2m loss. Cutting its final dividend in half didn’t help matters. There’s also some pessimism about its ability to bounce back from this situation. Following the recent Budget, staff costs are set to rise. Competition from rivals like B&Q is also a concern for the firm.
Dirt cheap valuation
While Topps Tiles has a lot of improvements to make, its low valuation could already be set to change. It’s currently trading with a forward price-to-earnings (P/E) ratio of 10. But analysts are projecting that the company will return to revenue growth in 2025 and continue this into 2026. In 2025, the average estimate is for sales to grow 16.3% to £293m. It’s then expected to grow by a further 6.4% to £311m.
This makes its shares seem like a bargain, even when factoring in last year’s poor results. It therefore seems as though a lot of the aforementioned pessimism is already baked in.
Now what?
Even after reflecting on its valuation, I’m still not so sure about Topps Tiles’ long-term prospects. I think it’s safer and more stable than many other penny stocks. And as it’s responsible for every one in five tiles sold across the UK, I don’t believe investors should worry about the company disappearing any time soon.
After falling 52.1% in the last five years, I also don’t think it can fall much further, especially with revenue predicted to start growing again. However, it’s a tile company. Its business fundamentally doesn’t excite me over what it can achieve in the next five to 10 years. A lot of its success will depend on the demand for tiles, which I don’t think will grow at an eye-catching rate.
Overall, if an investor puts £5,000 into Topps Tiles for the next year, I wouldn’t be surprised if they made a return. However, I also don’t think it would be that much. Therefore, I don’t think investors should consider its shares.
