I always find best value in stocks that are underpriced for their potential. But in today’s stock markets these are getting harder to find. Markets have been rising over the past year, and many recovery stocks have run up a fair bit. So it is an especially rewarding moment when I do find one that I like and it is priced low too. The stock I have in mind is the AIM-listed penny stock Staffline (LSE: STAF).
What’s up with the Staffline share price?
Staffline is trading at 55p right now, having seen a spectacular fall since September last year following its half-year results. The company did report a loss at the time, but it was minuscule compared to the loss it had seen in the year before. In other words, it looked like it could turn around. In an article I wrote on the company after the results were released, I was keen to buy it. My understanding was that its share price could rise further, though perhaps not at the same pace as before. But in the ensuing months, its share price actually fell.
Strong trading update
Since I have not bought the stock yet, I actually think it is a good opportunity to buy it now. The first big reason is that its latest trading update is encouraging. Its revenue has increased only by a small 1.6% for the year ending 31 December 2021, but its underlying operating profit is up by a huge 108% compared to the year before. Staffline also has a sunny outlook. It says it has exceeded expectations of both profitability and cash flow during the year. And it expects the momentum to continue into the next year as well. It is also confident of its prospects in the medium and long term.
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Dwindling risks
Next, the company’s earlier concerns about macroeconomic uncertainties seems to have disappeared. And I can see why. The UK economy has returned to pre-pandemic levels recently and its prospects look good too. The Brexit-related limbo that lingered for years is a thing of the past as is the worst of the pandemic, at least that is how it appears. The company also point to a pick up in the travel sector, which is one of its historically strong areas.
Competitively priced penny stock
Also, after its share price fall, the company’s market valuation looks particularly good. It is not a profit-making company, so we cannot consider price-to-earnings (P/E) here, but the price-to-sales (P/S) ratio is 0.1 times. Not only is this almost nothing, it is way smaller than that of its peers too. I think this in itself makes a case for me to buy the stock. The fact that its share price is quite low in absolute terms as well, considering that it is a penny stock, is another reason to like it. I will buy it soon.
