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It’s been a rough ride for penny stocks more recently, with jitters over the global economy sending prices sinking. This perhaps isn’t a surprise, given that younger and smaller companies are more vulnerable to adverse economic conditions.
Small-cap shares often lack the financial strength of larger companies, and don’t enjoy the stable and/or diversified revenue streams of bigger firms. This can make them more sensitive to interest rate hikes, increasing inflation, and a slowdown in consumer and business spending.
What’s more, such companies are often dependent on outside funding to operate and grow. This can be seriously compromised when downturns prompt a tightening in credit conditions.
Having said that, I believe a large number of penny stocks are currently so cheap that they demand a close look. Here are two that I think offer stunning value today.
Michelmersh Brick
Building material suppliers like Michelmersh Brick (LSE:MBH) could stand to lose if trade tariffs drive inflation higher. The subsequent (likely) increase in interest rates could choke off the UK housing market’s recent recovery and endanger future build rates.
Yet I believe this threat could be baked into the small cap’s low valuation. It looks especially cheap relative to earnings forecasts, trading on an undemanding price-to-earnings (P/E) ratio of 10.5 times for 2025.
Meanwhile, the company’s corresponding price-to-earnings growth (PEG) ratio is just 0.6, some distance below the value watermark of 1.
To provide an added sweetener, the brickmaker’s dividend yield for 2025 is 4.8%. To put it in context, that’s comfortably above the FTSE 100 average of 3.6%.
Encouragingly, Michelmersh also has a strong balance sheet (net cash: £6m) that can help it ride out any temporary pressure in its end markets. Its decision to resume a £2m share buyback programme last month underlines the firm’s strong financial foundations.
Over the long term, I think this penny stock has considerable growth potential amid government plans to supercharge housebuilding rates. Up to 1.5m new homes could be built between 2024 and 2029 under the current strategy.
Schroder European Real Estate Investment Trust
Like Michelmersh, property stock Schroder European Real Estate Investment Trust (LSE:SERE) would also be impacted by a sudden inflationary spurt. Alongside depressing its net asset values (NAVs), a subsequent rise in interest rates could also jack up its borrowing costs, thus impacting its expansion plans.
However, the stunning all-around value it currently offers still makes it worth a close look.
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Today the real estate investment trust (REIT) trades at a juicy 32.2% discount to its NAV per share. Its dividend yield is also more than double the FTSE average, at 7.6%.
By focusing on prime cities in Germany, France and The Netherlands, the Schroder European Real Estate Investment Trust provides significant earnings potential while facilitating strength through diversification. Its pan-sector exposure also gives it several major structural opportunities to exploit, including the e-commerce boom and the revival of office-based work.
According to REIT rules, it must pay a minimum of 90% of annual rental profits out in dividends. I’m optimistic this penny stock will remain a robust passive income share for the long term.
