Three 'penny' shares to buy now

published 9 October 2009

Littner hits the back of the net and penny share investors cheer all the way to the bank! That was the big story at the end of last week as Claude Littner, former chief executive of Tottenham Hotspur and confederate of Sir Alan Sugar, announced a 52p per share takeover bid for Powerleague Group (ticker: PWR).

Mr Littner is chairman of Powerleague, which has grown into one of the leading operators of six-a-side football facilities in the UK. Nearly four years ago, he was kind enough to show me round one of Powerleague's soccer venues in Watford.

I liked what I saw, and 18 months later I cashed in a 66% profit.

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That proved to be an excellent move because as the recession set in, the share price slumped. Powerleague became one of the many small company shares to really dwindle in the bear market.

This year the share price has been recovering. But it was the bid from the American leisure operator Patron Sports that revealed that the City was still missing the value of the business.

Here's proof that there's money to be made in penny shares

Patron Sport's bid came in at a 30% premium to the prevailing share price. Now I would not describe this bid as world-shaking, but it showed that the US company had recognised Powerleague's upsurge particularly in establishing itself in an industry leader in staging 'small-sided football' games.

This deal shows, once again, that the place for great value and quick gains is down among the small companies and the penny shares.

So who should you be looking at this week?

The AIM market of small companies may have risen nearly 70% from its March low, but there is still plenty of value to be found. Here are three examples that could brighten up your portfolio

Three 'extreme value' small caps to look at

Michelmersh Brick (LSE: MBH) is the country's leading maker of handmade bricks. It makes bricks for architects who want their buildings to have a unique look. Michelmersh has a net asset value per share of 75p. It also has a lot of building land near Telford which Persimmon is due to start building homes on next year. Shares in this asset-rich business trade at just 32p.

Public Service Properties (LSE: PSPI). I am not a big fan of UK property stocks, but that does not mean there aren't good areas to invest in. One of these is care homes. Demand for old-age care is high and keeps on rising. The government pays the bills, so long as those running the homes do the basics effectively, this should be a sound business.

Public Service Properties does not operate homes, but owns them instead. Even after the rally that followed last week's interim results the share price is unignorably low, at 83p. This is still well below the 153p net asset value and the shares yield a lusty 8%.

The third stock catching my eye is Anglesey Mining (LSE: AYM). Anglesey's main asset is a 50% interest in Labrador Iron Mines Holdings. Labrador is a Toronto-listed company with an opencast iron ore mine in Canada. It is due to start production there early next year.

According to analysts at Edison Research, Anglesey's stake in Labrador is worth 9.4p per Anglesey share. This is only a shade below its 10.25p share price. This means that Anglesey's ownership of the Parys Mountain zinc-copper-lead deposit in North Wales is virtually in the price for nothing.

Assuming that production goes ahead as planned, Edison estimates that Labrador will have earnings of over C$44m for the year ending March 31 2012. Anglesey's share of this would deliver earnings per share of 7.7p. So the shares trade at under two times earnings in other words, the company will only take two years to earn enough to cover the share price.

This may sound too good to be true, but this is how it is. These are all instances of extreme value. If these numbers applied to big companies you can bet that City investors would be swarming all over them.

Sooner or later this value is going to be reflected in higher share prices. And for private investors like you and I who have the nous to take advantage, this can only mean profit.

This article was written by Tom Bulford, and is taken from his free twice-weekly email the Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.