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When we invest in a penny share, the idea is that with such a low price the only way is surely up, right? Well, that can be a big mistake — and the biggest potential penny share loss is still 100%. But careful investors can often find some great recovery buys among the fallen.
To emphasise the need for caution, a once-popular UK penny share spiked up to 3p a few years ago, exciting investors about how much further it might go. But it’s lost 99% since then. And that tends to suggest a useful rule of thumb: don’t buy a stock just because of a low share price. So what should we look for?
What are penny shares?
In the UK, a market cap less then £100m and a share price under £1 generally denotes a penny share. So we don’t have to look for rock-bottom share prices and valuations. No, the definition can cover some very respectable, if relatively small, companies.
There’s another key thing to remember. Companies tend not to come to market by launching at a penny-share price. So it almost always signals that something has gone wrong to push the price down.
So look for companies whose share prices have been unfairly punished, and which have strong recovery prospects, right? I’ve seen some big profits made with that strategy.
One to consider
My Motley Fool colleague Royston Wild recently highlighted Alternative Income REIT (LSE: AIRE). The real estate investment trust has a portfolio of diversified commercial properties. It says it “seeks to deliver an attractive, secure, diversified and inflation-linked income return, whilst at least maintaining capital values in real terms.”
And straight away, it ticks a few of the right boxes for me.
At full-year results time the company said it’s targeting a dividend of at least 5.6p per share. Though lower than the 6.2p paid for 2025, it would still mean a 7.4% dividend yield. And that’s from a company with a trailing price-to-earnings (P/E) ratio of a modest 8.5.
Even though commercial property has been out of favour with investors, we’re still looking at a price-to-book ratio (P/B) of only around 0.9. And the latest net asset value (NAV) per share of 83.6p puts the shares on a 9.8% discount.
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Volatility risk
On the valuation front, Alternative Income looks attractive to me. But it’s very small, with only 20 property assets. And that could make the share price a fair bit more volatile than larger REITs.
The expected dividend dip for the current year is also a concern, which the company puts down to higher financing costs. It brings potential for further uncertainty.
But overall, this exemplifies the kind of things I look for in a penny share, and I rate it as definitely one to consider. I want a solid underlying business, ideally with a strong asset base. And a valuation that looks low relative to that. It’s actually got nothing to do with the share price itself.
