Investing in penny stocks can be a hair-raising business for some. Low-cost stocks like these can be subject to extreme stock price movements. The majority of penny stocks also tend to have weaker balance sheets than other large cap companies. This can hamper their growth potential and put them at risk when business conditions deteriorate.
I’m sure buying penny stocks might be a good idea for me, though. I always do a lot of research before buying UK stocks so I can weed out the weaker stocks and find the unloved gems. As a long-term investor, I’m also not put off by the prospect of some temporary volatility in stock prices. I am confident that the stocks I buy will rise sharply in value over a period of years.
With that in mind, here is a very cheap penny stock that I think could help me make a lot of money.
A premier retail penny stock
The purchasing power of buyers is under increasing pressure. Bank of England data shows that Britons less saved and more borrowed in December as they struggled with the problem of rising inflation. However, this strategy cannot go all the way as the inflation bubble expands and many people will need to shop smarter if they wish to maintain their standard of living.
TheWorks.co.uk (LSE: WRKS) is a penny stock that could benefit from this environment. The value retailer sells everyday items like books, crafts, board games and toys, the demand for which exceeds even the company’s lofty expectations. Like-for-like sales increased 14.5% (over two years) between May and October. And demand has remained strong since then, according to the penny stock, up 9% over the next 11 weeks.
The strength of e-commerce has also helped drive demand for TheWorks products. And I’m confident that continued investment in its e-commerce channel will be the cornerstone of long-term earnings growth. I think the low-cost retailer is a great buy despite the threat of supply chain issues that could lead to stock-outs and higher costs. The Works also faces competition from other retailers operating in the high-growth retail sector.
Too cheap to miss?
The Works, at current prices of 63p, is trading on a forward price-to-earnings (P/E) ratio of 6.8x. This is well below the widely accepted watermark value of 10 times and, in my opinion, does not reflect its proven resilience under harsh conditions.
Additionally, City analysts believe the company will start paying dividends soon after cutting them at the height of the pandemic. This follows his commitment”to advance its examination of the dividends” when announcing the half-year results last month. This was largely due to the company’s rapidly improving balance sheet (net cash soared 90% year-on-year to £17.8m in October).
A total payout of 2 pence per share is expected by city forecasters for this financial year (until April 2022). This translates into a hefty dividend yield of 3.2%. And things are looking up again for the 2023 financial year. Analysts predict an annual payout of 3.1 pence. This pushes the yield to an even better 4.9%. I think The Works is a brilliant penny stock I can buy today.
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Wild Royston has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.