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Two penny stocks that I think could take advantage of any potential economic positivity coming down the pike are: Topps Tiles (LSE: TPT) and HSS Rental Group (LSE: HSS).
I already own Topps stock, so I might consider purchasing more shares. However, I would love to purchase some HSS stock next time I have funds to invest.
What do they do?
Topps is one of the nation's largest tile and flooring retailers, with a broad retail presence.
HSS is one of the leading names in the UK construction equipment hire sector. It also has a strong retail presence across the country.
<h2 class="wp-block-heading" id="h-why-am-i-tipping-these-stocks-to-climb”>Why am I predicting these stocks will go up?
The construction sector has been under enormous pressure over the past 18 months or so due to economic turmoil, including higher interest rates and inflation.
Last week we had a new government! This means that certain economic issues will be prioritized to combat problems and boost growth.
Some of these issues could translate into good news for Topps and HSS. First, there are rumours that an interest rate cut could be just around the corner. This could be good news for homebuilders and also for the housing market in general.
Construction companies and homeowners could be back in the market for land, as well as for renting tools to tackle projects. This could boost the share price of both companies, as well as profits and, potentially, returns as well.
The other green shoot is that the new government has understood the need to address the housing imbalance in the UK. Demand currently outstrips supply. With inflation levels falling and a potentially more favourable housing market, demand for construction tools and flooring could also benefit HSS and Topps in the long term.
My investment case
Starting with Topps, the bullish case includes its deep experience and broad reach, as well as its dominant market position.
On top of this, the falling share price has pushed up the dividend yield to 9.2%, but this seems sustainable based on a decent-looking balance sheet. However, I understand that dividends are never guaranteed.
From a bearish perspective, competition in the tile and flooring market is more intense than ever. As shopping habits have changed, disruptors limited only to the Internet threaten Topps' presence in the market. In addition, Topps has to consider the high expense of renting, owning and maintaining a large retail network. This could reduce profits and returns.
As for HSS, the attractions of buying some shares are similar to those of Topps stock. It is rare to find small-cap companies that have been operating for many years, with plenty of information available, a good market position and decent growth prospects. The company opened 29 new branches last year and is looking to take advantage of the brighter horizons ahead for the construction industry. In addition, a forward dividend yield of over 7% is also attractive.
From a bearish perspective, however, the similarities with Topps continue. In addition to competition and retail outlets to worry about from a cost standpoint, inflation could rear its head again and cause private and commercial construction projects to not go ahead. These aspects could hurt earnings, returns and confidence.
