Penny shares (those that trade under £1) tend to be higher-risk, speculative investments. Their share prices can be extremely volatile, and it’s easy to lose money on them.

Having said that, these shares can potentially deliver large financial returns, so they can play a role within a well-diversified portfolio. With that in mind, here’s a look at two that I believe are worth a closer look right now.

Increasing its market share

First up is Topps Tiles (LSE: TPT). It’s the UK’s largest tile retailer with more than 300 stores nationwide. Its shares cost around 48p a pop, at present.

There are a number of reasons I think this stock is worth a closer look today.

One is that the company – which is already the market leader in tiles in the UK with a strong brand – is looking to increase its market share in the years ahead. By 2025, it’s aiming to capture £1 for every £5 spent on tiles in Britain, thereby increasing its market share to 20% from around 17% today. It’s worth noting here that the company said in January that it’s ahead of schedule in terms of this goal.

Another is I believe the slowdown in the UK property market we are witnessing right now could provide tailwinds for Topps. With fewer people moving now that interest rates are higher, we may see more people decide to renovate their existing homes and splash out on new tiles.

Finally, the valuation here is quite low. Currently, Topps has a forward-looking price-to-earnings (P/E) ratio of about 11. At that multiple, I see potential for share price appreciation.

Now, economic conditions are a risk here. If the cost-of-living crisis in the UK gets worse, Topps could be impacted negatively.

Overall however, I like the risk/reward skew at present.

Tailwinds from US onshoring

The other penny share I want to highlight today is Renold (LSE: RNO). It’s a leading international supplier of industrial chains and related power transmission products. Its shares cost about 26p each.

A trading update from Renold last month showed that the company has momentum at present. In the report, the company said it had “traded strongly” since its interim results in November, and that it expected operating profit for the full year (ending 31 March) to be above market forecasts.

It noted that its order book stood at £104.1m (a record high for the group) at the end of January, providing good visibility beyond the financial year end.

One thing Renold has going for it right now is that it generates around 40% of its revenues from the US. And the US is embarking on a massive ‘onshoring’ programme to eliminate supply chain vulnerabilities. This could provide big tailwinds for the group in the years ahead.

A risk to consider here is debt on the balance sheet. At 30 September 2022, net debt was £34m. This could present challenges now that interest rates are higher. Another risk is a weak macro environment.

I think these risks are largely priced into the stock however. Currently, Renold trades on a P/E ratio of less than six. At that valuation, I see the potential for share price gains.

Credit: Edward Sheldon – The Motley Fool UK

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