Choosing the right penny stock can be highly lucrative. There are plenty of stories of small companies that have gone on to bigger and better things, rewarding shareholders along the way.

But it’s not always like this. With their lack of financial firepower, it doesn’t take much to blow a penny stock off course. Here’s one example that’s been in the doldrums of late. However, are things are about to turn? Let’s see.

Who?

Not so long ago, Topps Tiles (LSE:TPT) wasn’t a penny stock. As recently as December 2023, it had a market-cap in excess of £100m. Since then, the group’s struggled. The post-pandemic surge in home improvements didn’t last long and increased employment costs have hit its bottom line.

In 2024, it bought CTD Tiles out of administration, a business focusing on the commercial sector. It’s expected to return to profitability in 2026.

The group’s shares are now (24 April) changing hands for 45% less than they were in April 2021. But did the group’s most recent trading update provide evidence of a recovery?

Growing in a shrinking market

Excluding CTD Tiles, revenue was 2.1% higher during the 26 weeks to 28 March than for the same period a year earlier. Importantly, it beat the wider market, which was down around 2.5%.

But the group’s not exactly flying at the moment. The trading update contained the phrase “subdued customer sentiment”, which added to a sense that the business isn’t really going anywhere at the moment.

What do the experts think?

Despite this, analysts reckon the group’s shares are up to 58% undervalued. Admittedly, there are only three City professionals covering the stock. However, they have all set targets – 60p, 50p, and 40p respectively – that are above the group’s share price of 38p.

The analysts are clearly persuaded by the Topps Tiles investment case:

• Exposure to a target market of £2.1bn – it’s recently started selling wood and laminate floors, shower screens and splashbacks. Through its six brands, it sells to residential customers across all price points. It’s expanded into the trade market and sells directly to contractors, architects and designers.
• Strong balance sheet – it reported a net cash position of £7.4m at 27 September 2025.
• A complementary store network and internet business – the majority of web sales involve a trip to one of its 300+ physical stores. In addition, nearly all of the group’s in-store shoppers interact with its website.

Having successfully delivered its “1 in 5 by 2025” target (20% market share) ahead of schedule, it’s now adopted “Mission 365”. It’s aiming for revenue of £365m in “the medium term”. For context, sales during the year ended 30 September 2025 were £295m.

Am I missing something?

To be honest, I see Topps Tiles as more of an income share than a growth stock. It seeks to pay at least 67% of adjusted earnings per share in dividends each year. Over the past five years, it’s offered an attractive yield.

Financial year	Dividend (pence)	Share price (pence)	Yield (%)
30.9.25	2.9	35.1	8.3
30.9.24	2.4	43.4	5.5
30.9.23	3.6	48.4	7.4
30.9.22	3.6	38.5	9.4
30.9.21	3.1	68.6	4.5

But as a reminder that dividends cannot be guaranteed, its payout’s been erratic. And to be honest, given it’s rather unexciting current performance, I wouldn’t rule out another cut soon.

On balance, I don’t feel Topps Tiles is the bargain that its yield — or its historically low share price — suggests. I believe there are many better opportunities to consider elsewhere.