A cheap penny stock to buy in February

Buying unloved penny stocks can be a very good thing. Small-cap stocks often trade lightly and are slower to react to good news than larger stocks. When he recovered, he was able to make rapid progress.

Of course, this strategy is not without risk. Sometimes small and cheap companies are like that for good reason. It could always be worse, too.

Therefore, I focus more than usual on financial health and profitability when buying shares in small companies. If the fundamentals are strong and the shares look cheap, I hope I will have some protection against big losses.

A bargain in the presence of an empty?

The company I will be looking at today is specialist masons Michelmersh Brick Holdings (LSE: MBH).

Shares in this business have fallen 35% over the past two years as the market has experienced a housing downturn. However, Michelmersh’s trading remains strong and the group’s financial position looks healthy to me.

2 hidden attractions

I think this business has two attractions that may not be obvious at first glance.

One of them is that this company operates in the premium market. Michelmersh brick brand included Charnwood, Blockleysand Carlton. According to the company, now “Having most of the UK’s premium manufacturing brick brands”.

The appeal of premium brands is that these brick buyers don’t just want the cheapest product. They want the quality and look of a certain Michelmersh product, and they are willing to pay for it.

For the most part, British brick manufacturers have been unable to keep up with demand during the housing boom of recent years. Imports have created shortages. But importing bricks is expensive, because they are heavy and bulky.

If housebuilders are cutting back on new builds and demand for bricks is slowing, then I expect British bricks to be chosen ahead of imports. That could help protect British brickmakers from falling demand.

Strong trading + pile of cash

Michelmersh’s latest trading update seems to support this view. In November, the company said 2022 results should be ahead of expectations. The order book for 2023 is called “Strong and balanced”.

This business also has a lot of cash, thanks to double profits and careful management. At the end of November, net cash stood at £8.5m. That’s roughly equivalent to a year’s worth of income, providing a useful safety net.

The obvious concern is that as construction activity slows, Michelmersh will see demand for its products fall. I am not sure that this will not happen, but as I mentioned above, I think that the distinctive brand and financial strength should provide a margin of safety.

Too cheap to notice?

Michelmersh shares are currently trading at a forecast 2023 price-to-earnings ratio of nine, with a dividend yield of 4%. Brokerage forecasts show the company’s earnings will be flat in 2023, before growing again in 2024.

I believe the shares look cheap at this level. In my view, this is one of the best penny stocks on the UK market today.