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Penny stocks (those trading below £1) tend to be riskier speculative investments. Their stock prices can be extremely volatile and it is easy to lose money on them.
That being said, these stocks can generate large financial returns, so they can play a role within a well-diversified portfolio. With that in mind, here’s a look at two that I think are worth a closer look at right now.
Increasing your market share
first is Topps Tiles (LSE: TPT). It is the UK’s largest tile retailer with over 300 stores across the country. His shares cost about 48 pence each, today.
There are a number of reasons why I think this stock is worth taking a closer look at today.
One is that the company, already the UK tile market leader with a strong brand name, is looking to increase its market share in the coming years. By 2025, it aims to capture £1 for every £5 spent on tiles in Britain, thus increasing its market share to 20% from around 17% today. It’s worth noting here that the company said in January that it is ahead of schedule in terms of this target.
Another is that I think the slowdown in the UK housing market that we are seeing right now could provide tailwinds for Topps. With fewer people moving now that interest rates are higher, we may see more people decide to renovate their existing homes and spend money on new tiles.
Finally, the valuation here is quite low. Topps currently has a forward-looking price-earnings (P/E) ratio of around 11. At that multiple, I see potential for stock price appreciation.
Now, economic conditions are a risk here. If the UK cost of living crisis worsens, Topps could be negatively affected.
In general though, I like the risk/reward bias these days.
Tailwinds from US onshoring
The other shared penny I want to highlight today is Renold (LSE:RNO). It is a leading international supplier of industrial chains and related power transmission products. Its shares cost about 26 pence each.
A business update from Renold last month showed the company has momentum at present. In the report, the company said there were “heavily negotiated” since its interim results in November, and that it expected operating profit for the full year (ending March 31) to be above market forecasts.
It noted that its order book stood at £104.1m (a group record) at the end of January, providing good visibility beyond the end of the financial year.
One thing Renold has going for it at the moment is that it generates about 40% of its revenue in the US and the US is embarking on a massive ‘localization’ program to remove vulnerabilities in the chain. of supply. This could provide big tailwinds for the group for years to come.
One risk to consider here is balance sheet debt. As of September 30, 2022, the net debt was £34 million. This could present challenges now that interest rates are higher. Another risk is a weak macroeconomic environment.
However, I think these risks are largely factored into the share price. Renold is currently trading with a P/E ratio of less than six. In that valuation, I see the potential for gains in the stock price.
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