A penny stock is generally a small company with a share price under 100p. Over the years, I’ve found that hunting among these small-cap stocks can be a good way to find overlooked gems.
I think that’s what I’ve done here. The company I’m going to talk about today is highly profitable, growing steadily, and offers a 4% dividend yield. I reckon the shares are probably too cheap. Here’s why.
A successful growth story
The company in question is mining services group Capital (LSE: CAPD). This firm was founded in 2005 as a drilling contractor operating in the East African gold mining sector.
Capital has since expanded to offer a broader range of contract mining services across Africa and the Middle East. The business also has a valuable laboratory business, MSALABS, which tests mining samples for mineral content — an essential service for mining operators.
Profits have soared in recent years, rising from $5m in 2017 to $70m last year. This rate of growth has been helped by the recovery in the price of gold, which rose from around $1,200/oz to $1,800/oz over the same period.
I don’t expect Capital’s profits to continue growing at this rate. But unless the gold mining sector suffers another serious slump, I think this business should be able to continue expanding.
When I’m investing in penny stocks, I try and find companies where senior management have big shareholdings. In my experience, owner-managers often have a long-term focus and a cautious approach to debt, which I like.
Capital seems to satisfy both of these requirements. Founder Brian Rudd remains a director and still has a 6% shareholding. Executive chairman Jamie Boyton, who joined in 2007, owns 12% of the business.
Debt levels are low and look very comfortable to me. I’m confident Capital could survive a downturn without serious financial problems, especially as a lot of its revenue is tied to long-term contracts.
What could go wrong?
All investments carry some risk. When I invest in a new business, I always try to imagine what could go wrong. If I can’t think of any potential problems, that probably means I haven’t understood the business properly.
I’m pretty happy that Capital is well managed and has a sensible growth plan. My main concern is over the cyclical nature of the gold business and an unusual quirk in Capital’s business model.
In addition to providing fee-based services, Capital also invests directly in some of its customers. These investments were valued at $47m at the end of June, so they’re quite significant.
I’m sure that Capital is a very well-informed investor. But mining is a risky business. If the market heads south, these shares could end up losing much of their value.
I’d buy this penny stock
Capital isn’t without risk, but I rate the company’s management highly. The firm’s shares are currently trading below their book value and on just five times forecast earnings. There’s also the 4% dividend yield I mentioned earlier. That should provide me with an attractive cash income while I hold.
On balance, I think Capital shares are too cheap. This penny stock is on my list as a potential buy when I next have cash available in my portfolio.
The post A dirt-cheap penny stock with a dividend I’d buy today appeared first on The Motley Fool UK.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.