Penny stocks are notoriously volatile. Yet this region of the stock market also contains some exciting enterprises and once-thriving corporations with the potential to bounce back. While the stakes are high, a success story among these tiny businesses can translate into enormous returns for patient investors.
Recently, I stumbled across two companies that have piqued my interest. Investors may want to hold off from buying shares today. But keeping an eye on how they develop in 2023 and beyond could reveal future buying opportunities.
Sustainably supplying wood
A lot of excitement surrounding Woodbois (LSE:WBI) emerged earlier this year. In fact, the share price soared to as high as 9.39p in May, only to come tumbling down to around 2p today.
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As a quick reminder, Woodbois owns and operates sawmills and veneer factories in Africa. With around 23 hectares of forest at its disposal, the group provides a steady stream of hardwood and related products. Meanwhile, with a reforestation division, the firm operates in an environmentally friendly way, ranking as the eighth most sustainable timber supplier worldwide.
The latest quarterly results showed revenues growing by 29%, reaching $5.8m. This largely stems from increased production as sawmill and veneer activities surged by 78% and 45% respectively, compared to last year’s average.
Needless to say, that’s good. So why has the penny stock taken such a beating? It seems investors got a bit overeager, sending the valuation to frankly absurd levels. Even today, after dropping by 50% in the last 12 months, its market capitalisation stands at around £52m. That puts the price-to-sales ratio at a lofty 10 times!
Given time, the firm may grow enough to justify the high price tag, making it a good story to watch closely. But for now, it’s an expensive stock with a lot left to prove.
Can this penny stock make a comeback?
Before the pandemic, Cineworld (LSE:CINE) was a seemingly thriving enterprise sating the appetites of growth investors. Yet a decade of borrowing ultimately led to its demise when Covid took a sledgehammer to its cash flow. And in the space of two years, the group went from the FTSE 250 to penny stock territory and even filed for Chapter 11 bankruptcy.
But there may be a glimmer of hope. At the start of November, management reached a settlement agreement with its creditors and landlords. Beyond wiping out $1bn from its loans, the group has some breathing space to get things back on track.
With an impressive line-up of new blockbuster titles and Covid restrictions no longer disrupting operations, optimism for a comeback is brewing. But as exciting as that would be, there remains a long road ahead. The firm still has a multi-billion-pound pile of debt, and with interest rates on the rise, profit margins aren’t likely to be restored anytime soon.
Nevertheless, it’s certainly an interesting story to follow. And once a clearer picture of its financials emerges, investors may be able to judge just how long its recovery might take.
