Was this penny stock a silly purchase?

I own a few penny stocks in my Stocks and Shares ISA. Of them, one is now worth substantially less than I paid for it. On top of that, 2025 could potentially see things get worse not better.

So, was this a mistake for me to buy – and ought I to sell?

A challenging 2024 for a longstanding business

The share in question is Topps Tiles (LSE: TPT).

It is down in value by 23% over the past year and over half on a five-year timeframe. Ouch.

There are good reasons for the fall in the past year, in my opinion. Last year saw like-for-like revenues fall 9%. A £7m profit before tax the prior year turned into a £16m pre-tax loss.

The dividend per share was cut by a third. I think it is one of the reasons some investors hang onto the stock, so it is understandable that the board was loathe to axe it altogether.

Still, given the loss last year, I see a risk that the dividend could yet go to zero.

Might 2025 be any better?

Some of the reasons for last year’s poor performance could be just as bad – or worse – this year.

Weak demand in the tile market is a critical one. On top of that, the company’s acquisition of assets from bankrupt rival CTD last year (currently under investigation by competition authorities) divides investor opinion. Some see it as ill-planned and potentially not the most cost-effective way for Topps to build further scale.

I am more positive about that, seeing it as an opportunistic move that helps the business build credibility in areas adjacent to its main business, such as selling to architects.

Topps has a strong market position, selling one in five tiles bought across the nation. That came about as part of a concerted strategic push and it has another plan to grow its sales to around £1m per day on average.

Lots still to prove

But while sales are one thing, profits are what matter to investors.

Last week, Topps announced that in its most recent quarter, it had returned to sales growth. In the last 12 weeks of last year, like-for-like sales grew 5% year on year.

The chief executive has announced plans to stand down and any hiccoughs in succession and handover could add further risks to the company’s financial performance.

While I am happy about the return to sales growth, I will be keeping a close eye on the company’s interim results a few months from now to see whether it has also moved back into the black after last year’s losses.

Clearly there are multiple risks here. But I do not think buying Topps was silly. It remains a solid business in an area I expect to benefit from strong demand over the long run. So I have no plans to get rid of this penny stock from my portfolio.

The post Was this penny stock a silly purchase? appeared first on The Motley Fool UK.

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C Ruane has positions in Topps Tiles Plc. 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.