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While looking for new interesting stocks recently, a construction company focused on sustainability caught my eye. It is technically no longer a penny stock, as its share price is above 100 pence. But with a valuation of just £66m, it is certainly promising.
aluminum (LSE:ALU) is a UK-based provider of sustainable building solutions aimed at preserving water, reducing energy and using recyclable materials. He has been awarded the London Stock Exchange Green Economy Mark for its contributions to reducing waste and improving the environment.
Why should I care?
According to a recent report by the American audit and advisory firm Deloitte, renewable energies are “They are preparing for a variable speed takeoff as historic investment, competitiveness and demand drive their development.“.
The report goes on to detail how federal investment in clean energy has never been stronger. Nor has demand from public and private entities to accelerate decarbonization efforts. In the United Kingdom, these types of initiatives are even more evident. As a company that complements this industry, Alumasc is well positioned to reap the benefits of its growth.
However, the road will not be easy.
In many ways, the costs of renewable energy solutions still outweigh the benefits. Wind power, for example, typically costs more to implement and maintain than the value of the energy it produces. This has been a thorn in the clean energy debate for years. And while Alumasc is not directly involved in renewable energy production, its success is tied to the perceived legitimacy of the industry as a whole.
If the wave of favor shifted away from sustainable energy solutions, demand for Alumasc products would likely decline. I think this is unlikely considering the growing concerns about climate change, but it is still possible.
So it's a purchase?
Alumasc is just one of many small business entities set to benefit from the growing demand for a sustainable future. But it's one that appears to have even greater growth potential than others I've evaluated.
The share price is up 94% over the past five years, despite suffering significant losses in 2022 as inflation slowed the economy. As such, the weakened price is estimated to be undervalued by 34% using a discounted cash flow model. The strong earnings have also reduced the price-to-earnings (P/E) ratio to 8.3, nearly half the industry average.
And the icing on the cake? A 5.6% dividend yield that is well covered by earnings and backed by a decade of consistent payments. All in all, I see plenty of good reasons why stocks still have more room to grow.
The bottom line
Investing in penny stocks is always a riskier prospect than established large-cap companies. In this case, the cyclical nature of the construction industry combined with strong competition and fluctuations in raw material prices could threaten Alumasc's profits.
So, to stay ahead, you have your work cut out for you. But if it pulls it off, it could be the next big name in sustainable solutions. If I were looking to add penny stocks to my portfolio today, this would be the one.
