Experts are predicting a 56% increase for this penny stock with a yield of 4.6%!

Penny stocks are often underpriced. Sometimes, the market is too expensive, which means I don’t stay. But often, the big companies sell for a lot cheaper than I think they’re worth. These are the stocks I want to buy.

56% growth in the annual forecast

One I have been watching for a long time with its shares selling for less than £1 Michelmersh Brick Holdings share price (LSE:MBH). This business manufactures premium, durable clay bricks, tiles, and other related products.

paid a dividend of 4.6 %. Furthermore, the analyst’s 12-month price target is £1.52, indicating a potential upside of 56%. While that’s not guaranteed, that could be a pretty big short-term return.

Yes, as a Fool, I only look for long term investments. I believe at its current valuation and its strong dividend yield, these stocks are worth buying and holding for years.

Over the past decade, the company has had a median price-to-earnings ratio of 16.7. Today it is as low as 11.4. Analysts estimate that revenue will gradually increase in 2025 after a recent reduction in 2024.

When growth temporarily slows and prices drop, that’s when I buy. After all, it was Warren Buffett who taught us “Be selfish when others are afraid, and be afraid when others are greedy”.

What risks do I face?

The biggest area of ​​weakness for the company that I have noticed is that it has very weak free cash flow at the moment. This means that it can be difficult to finance new expansion strategies, as that is the money left over after paying for all the operating and equipment costs.

I expect this to improve next year as the Bank of England may cut interest rates soon. This should boost the demand for Michelmersh products as people can finance the construction of new buildings with lower borrowing costs.

Furthermore, I must remember that this is not exactly the following Nvidia. Michelmersh’s price has increased by only 39% in the last 10 years. However, its low price analysts think could increase its price significantly in the next year.

Despite this near-term potential for growth, I expect stocks to grow very slowly over the next decade. There may be down times, so dividend yield is very important to me.

Stability over happiness

My favorite investor, Warren Buffett, is slow and steady in his investment approach. Instead of looking for quick profits from exciting new fads, the Oracle of Omaha looks for long-term businesses that the market has underestimated.

While Michelmersh Brick Holdings isn’t as strong as some of Buffett’s best investments, it’s certainly well placed for now. Because its balance sheet is strong and it has very low debt, I feel comfortable owning the shares and intend to hold them for many years.

The following chart shows that the company currently has £222m more cash and equity than total debt:

A stellar purchase for a long time

For me, the potential far outweighs the risks here. I will probably buy shares in the company next month. I hope I get them before the ratings start going up!