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Choosing the right penny stock can be highly lucrative. There are plenty of stories of small companies that have gone on to bigger and better things, rewarding shareholders along the way.
But itâs not always like this. With their lack of financial firepower, it doesnât take much to blow a penny stock off course. Hereâs one example thatâs been in the doldrums of late. However, are things are about to turn? Letâs see.
Who?
Not so long ago, Topps Tiles (LSE:TPT) wasnât a penny stock. As recently as December 2023, it had a market-cap in excess of £100m. Since then, the groupâs struggled. The post-pandemic surge in home improvements didnât last long and increased employment costs have hit its bottom line.
In 2024, it bought CTD Tiles out of administration, a business focusing on the commercial sector. Itâs expected to return to profitability in 2026.
The groupâs shares are now (24 April) changing hands for 45% less than they were in April 2021. But did the groupâs most recent trading update provide evidence of a recovery?
Growing in a shrinking market
Excluding CTD Tiles, revenue was 2.1% higher during the 26 weeks to 28 March than for the same period a year earlier. Importantly, it beat the wider market, which was down around 2.5%.
But the groupâs not exactly flying at the moment. The trading update contained the phrase âsubdued customer sentimentâ, which added to a sense that the business isnât really going anywhere at the moment.
What do the experts think?
Despite this, analysts reckon the groupâs shares are up to 58% undervalued. Admittedly, there are only three City professionals covering the stock. However, they have all set targets â 60p, 50p, and 40p respectively â that are above the groupâs share price of 38p.
The analysts are clearly persuaded by the Topps Tiles investment case:
- Exposure to a target market of £2.1bn â itâs recently started selling wood and laminate floors, shower screens and splashbacks. Through its six brands, it sells to residential customers across all price points. Itâs expanded into the trade market and sells directly to contractors, architects and designers.
- Strong balance sheet â it reported a net cash position of £7.4m at 27 September 2025.
- A complementary store network and internet business â the majority of web sales involve a trip to one of its 300+ physical stores. In addition, nearly all of the groupâs in-store shoppers interact with its website.
Having successfully delivered its â1 in 5 by 2025â target (20% market share) ahead of schedule, itâs now adopted âMission 365â. Itâs aiming for revenue of £365m in âthe medium termâ. For context, sales during the year ended 30 September 2025 were £295m.
Am I missing something?
To be honest, I see Topps Tiles as more of an income share than a growth stock. It seeks to pay at least 67% of adjusted earnings per share in dividends each year. Over the past five years, itâs offered an attractive yield.
| Financial year | Dividend (pence) | Share price (pence) | Yield (%) |
|---|---|---|---|
| 30.9.25 | 2.9 | 35.1 | 8.3 |
| 30.9.24 | 2.4 | 43.4 | 5.5 |
| 30.9.23 | 3.6 | 48.4 | 7.4 |
| 30.9.22 | 3.6 | 38.5 | 9.4 |
| 30.9.21 | 3.1 | 68.6 | 4.5 |
But as a reminder that dividends cannot be guaranteed, its payout’s been erratic. And to be honest, given itâs rather unexciting current performance, I wouldnât rule out another cut soon.
On balance, I donât feel Topps Tiles is the bargain that its yield — or its historically low share price — suggests. I believe there are many better opportunities to consider elsewhere.
The post Potentially 58% undervalued, is this a penny stock bargain? appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended London Stock Exchange Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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