If I ever needed reminding that penny stocks have at least the potential to dramatically alter my wealth far quicker than the average blue-chip, I only need to look at McBride (LSE: MCB).
As I type, shares in the household and professional cleaning products manufacturer have soared over 300% in 2023.
What’s gone so right?
In a nutshell, its success is all down to the company upgrading guidance several times.
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Having endured a rise in costs in recent years due to the pandemic-related disruption of supply chains and the Ukraine-Russia conflict, McBride announced in July it was back to making a profit. News of business wins and strong demand from existing clients was also lapped up by the market.
Not that this reaction is really that surprising. There were once concerns that McBride might be a goner.
What makes the small-cap’s performance particularly noteworthy however, is that a good chunk of its gains have only been made in the past couple of months.
Go back to mid-October and the stock was changing hands for around 32p. But in November, McBride said that it was continuing to trade ahead of expectations. Overall volumes were 8.2% higher in the first four months of the current financial year. Budget items were proving particularly popular as consumers looked to make their pounds stretch.
By mid-December, those very same shares were trading for almost 90p a pop.
Still cheap?
Despite the massive gain seen over this year, McBride still trades on a forecast price-to-earnings (P/E) ratio of less than six. That looks screamingly good value, at least initially.
Then again, no investment is devoid of risk. The company has already said it “remains alert” to the impact of world events on commodity markets. This may lead to more cost pressures kicking back in for what is already a (very) low-margin business.
Another, more general thing to remember about small-cap stocks is that they tend to be far more volatile than the average FTSE 100 juggernaut. That can lead to huge gains in the good times but the opposite can also be true when economic clouds gather, or during a simple bout of profit-taking.
Too much debt for my liking
My main concern here is the debt pile. This is currently around the same as the value of the entire business!
Now this doesn’t matter quite so much if trading keeps improving. But that ‘if’ is the most important word in that sentence.
Having a weak balance sheet also means that dividends aren’t on the menu. That’s understandable. The problem is that I won’t be compensated if the shares now fall. Being paid to be patient is one thing, not being paid while my holding shrinks in value and other stocks fly is another.
All this helps to explain that still-seriously-low valuation. But it’s hardly comforting.
Not for me (probably)
I congratulate any Fools who dared to invest in McBride at the beginning of the year. As much as I would have enjoyed those gains, I know my risk tolerance wouldn’t have allowed it.
For now, I’m happy to sit on the sidelines. If the debt reduces, I may reconsider.
In the meantime, I’m concentrating on picking up some much higher-quality stocks before the next bull market arrives.
