Investing in penny stocks can be a hair-raising endeavour for some. Low-cost shares like these can be prone to bouts of extreme share price movement. The majority of penny stocks also tend to have weaker balance sheets than other larger-cap companies. This can hamper their growth potential and put them in danger when trading conditions worsen.
I’m confident that buying penny stocks could be a good idea for me, however. I always do a lot of research before buying UK shares so I can root out the weaker bargain shares and find the unloved gems. As a long-term investor I’m also not put off my the prospect of some temporary share price volatility. I’m confident the stocks I buy will rise strongly in value over a period of years.
With this in mind here’s a dirt-cheap penny stock I think could help me make lots of cash.
A top retail penny stock
Shopper spending power is coming under increasing pressure. Bank of England data shows that Britons saved less and borrowed more in December as they battled the problem of rising inflation. There’s only so far this strategy can go, however, as the inflationary bubble expands and many people will have to shop more cleverly if they wish to maintain their standard of living.
TheWorks.co.uk (LSE: WRKS) is a penny stock that could benefit in this environment. The value retailer sells everyday items like books, craft items, board games and toys, demand for which is exceeding even the company’s lofty expectations. Like-for-like sales rose 14.5% (on a two-year basis) between May and October. And demand has remained strong since then, the penny stock says, up 9% in the following 11 weeks.
Strong online trading has helped turbocharge demand for TheWorks’ goods too. And I’m confident that continued investment in its e-commerce channel will provide a cornerstone for long-term profits growth. I think the low-cost retailer’s a great buy despite the threat from supply chain problems that could result in stock shortages and higher costs. The Works also faces competition from other retailers operating in the fast-growing value retail sector.
Too cheap to miss?
The Works, at current prices of 63p, trades on a forward price-to-earnings (P/E) ratio of 6.8 times. This is well below the widely-accepted value watermark of 10 times and in my opinion fails to reflect its proven resilience in difficult conditions.
What’s more, City analysts think the company will begin paying dividends soon after axing them at the height of the pandemic. This follows its pledge “to bring forward its review regarding dividends” at last month’s half-year results announcement. This is thanks in large part to the company’s rapidly-improving balance sheet (net cash soared 90% year-on-year to £17.8m as of October).
A total payout of 2p per share is predicted by City forecasters for this financial year (to April 2022). This results in a juicy 3.2% dividend yield. And things get even better for financial 2023. Analysts are predicting a full-year payout of 3.1p. This nudges the yield to an even-better 4.9%. I think The Works is a brilliant penny stock for me to buy today.
