Stock market

1 high-risk, high-reward penny stock currently at 26p.

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In the world of penny stocks, there is no such thing as a free lunch. What I mean is that there are very few low-risk options to consider that can yield huge returns. Thus, I have to accept a higher level of risk to unlock higher potential rewards. Here’s an example that might be a great buy right now.

A roller coaster of a year

Focus is on the company Revolution Beauty Group (LSE:REVB). It has a market cap of £82m and a current share price of 26p. As such, it ticks the box to be classified as a penny stock.

Shares have gained 6% over the past year. However, it doesn’t do justice to the wild swings in the stock.

Last year the business suffered the departure of several senior leaders, including CFO Elizabeth Lake, former chairman Tom Allsworth and co-founder Adam Minto. During this period, an accounting investigation was carried out as well as a settlement was reached with Minto in which it had to repay £2.9m to the firm.

As progress was made back and forth with the above, share prices rose and fell. Being a major shareholder in the business didn’t help either. Boho. The fast fashion giant was pushing for the removal of key executives. The aim was to replace them with their own candidates, for example the role of CFO.

So far, the roller coaster ride seems to be over. Going forward, if we can get a couple more years of stability from senior management, it can really help the business grow. This should result in an increase in share price.

Getting back to basics

Internal politics aside, the business seems fundamentally sound. Although we are still waiting for the release of the 2023 results (the financial year ends in February), the latest update was positive.

It raised the EBITDA forecast to £12.5m, from a previous estimate of £11m-£12m. If it records profit before tax, it will be a huge positive. Since the stock went public in 2021, it hasn’t made a profit. Indeed, last year it posted a loss of £33.9m. So a return to profitability will be a huge step forward.

Although the stock jumped on the news, I would expect a further jump on confirmation when the results come out.

Balancing the risks

There is a huge potential reward here. In the summer of 2022 the stock was above 100p. But there are risks involved. The issues cleared out by senior management have damaged the brand’s reputation. I think big institutional investors will want to wait and see how things play out this year before they commit and buy.

Another threat we need to recognize is the competitive nature of the beauty industry. It is dominated by major players from Revolution Beauty. With low margins and everyone trying to get more market share, it’s not an easy place to compete.

But I think I’m going to make a small allocation to the stock, given the huge potential for the share price to recover.

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