My definition of a penny stock is a company that has a market-cap below £100m and a share price below £1. These small firms can offer some large potential rewards for investors. However, they often have high volatility and rapid share price movements that can make it stressful to try and invest. Here’s one that’s been falling recently that I like.
Problems in the recent past
Lords Group Trading (LSE:LORD) is a specialist distributor of building, plumbing, heating and DIY goods. It sells mostly to the trade in the UK, but also to the general public. It currently has a market-cap of just under £70m and a share price at 40.5p.
Over the past year, the stock’s moved lower by 31% and closed Friday at a fresh 52-week low. There have been a few reasons contributing to the fall over this period.
Part of it comes from the readjusting of expectations following 2022 results. Over the past year, the company hasn’t kept up with the expected pace of growth in revenue and profitability. Therefore, there’s some disappointment expressed via the lower share price.
Another factor has been high interest rates. This was flagged up in the 2023 annual report. Higher rates hurt Lords because it does have debt, as well as extensive credit facilities. As of the end of last year, net debt stood at £28.5m. This was up from the £19.4m the year before. So the combination of higher debt and the larger cost of servicing it isn’t a positive.
Why I think it’s undervalued
Despite these factors, I think the stock now looks cheap. For one reason, I don’t think the value of the recent acquisitions are fully factored in to the stock. This includes Alloway Timber and Chiltern Timber, both acquired last year.
It takes time to fully integrate these companies and to realise the revenue benefit and the economies of scale. I think this will only start to be seen in the 2024 results. At that stage, I believe investors will be impressed by the value added here.
Another reason why I think it’s cheap is due to the market conditions. I fully accept that over the past year, many consumers have held off doing home projects or getting in tradesmen to furbish new properties. The is due to the cost-of-living crisis and high mortgage rates.
Yet looking ahead, interest rates should fall later this year, and inflation is easing cost pressures. This should make people feel more confident in buying homes or doing improvements. As a result, this should boost demand for Lords, given the sector it operates in.
The bottom line
I don’t think Lords is getting the attention it deserves and is under a bit of a cloud right now. Yet I’m seriously thinking about buying the stock as I think sentiment will change and people will realise the value it has.
This post was originally published on Motley Fool
