Like many other Fools, I recently ran the rule over RC365 (LSE: RCGH) shares. To be blunt, I didn’t like what I saw, cautioning in August that I was “yet to see a stock experience such a meteoric rise and not eventually tumble“.
Nevertheless, I didn’t think the bubble would burst so soon.
What goes up…
At the time of writing, the RC365 share price has crashed 50% in the last month, including a 23% fall in the week ending 8 September.
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Now, don’t get me wrong. It’s incredibly hard to ignore a stock that had previously delivered life-changing returns since listing in March 2022. And yes, RC365 shares are still up over 170% year-to-date. However, this will be little comfort to those who bought only recently.
If anything, this performance is further evidence that penny stock investing — particularly in loss-making businesses — requires a strong stomach. A good test of this is to consult a company’s free float — the percentage of a company’s shares that are available for trading on the market.
RC365’s free float is just 34%. In practice, this means that the impact of any buying or selling is likely to be higher when compared to your average FTSE 100 or FTSE 250 chugger. In other words, it takes only a small transaction to really move the price up or down.
Now, it would be wrong to assume that RC365 is doomed to keep falling in value. News of more agreements being signed with other firms could see the price rally. The company could have a golden future.
However, these developments take time and investors are a notoriously impatient bunch.
So, I’m still pushing RC365 away with a barge pole.
Better buy
Costain (LSE: COST) is the sort of penny stock I’d be far more likely to buy if I had the cash available. In sharp contrast to its small-cap peer, the Maidenhead-based sustainable infrastructure company has been listed since the mid-1980s.
And while no match for RC365 in terms of gains, the shares are up just under 50% in 2023 so far. That’s a brilliant return considering how gloomy the UK market is in general.
August’s half-year numbers go some way to explaining why. Adjusted pre-tax profit rose 19.5% to £15.9m on the back of increased demand for its consultancy and advisory services and digital technology solutions. In light of a “high-quality” order book, it’s no surprise that management is considering reinstating dividends after a four-year gap.
Despite this, the shares still change hands on a price-to-earnings (P/E) ratio of under six. That seems far too cheap, especially as Costain had net cash of £132m on its balance sheet at the end of June — roughly 80% of its entire market cap!
Staying grounded
It seems fairly apparent to me that Costain isn’t a share that will double my money or more in only a few weeks. As such, it’s likely that it won’t hit the radars of any potential (or existing) RC365 investors.
There are risks too. Analyst projections often need to be revised, sometimes substantially. Costain’s operating margins are also wafer-thin.
Notwithstanding this, the free float here is near 80%. Theoretically, this should make the stock less volatile than RC365 shares if earnings come in slightly lower than expected.
Given the choice, I know which I’d rather own!
