In the world of penny stocks, there’s no such thing as a free lunch. What I mean is that there are very few low-risk options to consider that could also yield a large profit. As such, I have to accept a higher level of risk in order to unlock the higher potential rewards. Here’s one example that could be a smart buy at the moment.
A rollercoaster of a year
The company in focus is 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.
Over the past year the share price has rallied by 6%. However, this doesn’t do justice to the wild swings in the stock.
Last year the business had to contend with the departure of several senior leaders, including the CFO Elizabeth Lake, the former chairman Tom Allsworth and co-founder Adam Minto. During this period, there was an accounting probe, as well as an agreed settlement with Minto in which he had to pay back £2.9m to the firm.
As the developments with the above went back and forth, the share price dipped and rallied. This also wasn’t helped by the major shareholder in the business, boohoo. The fast fashion giant was pushing for the removal of the key execs. It aimed to replace them with its own candidates, for example the CFO role.
Yet for now, the rollercoaster ride seems to be over. Up ahead, if we can get a more stable couple of years from senior management, it could really help the business to grow. In turn this should lift the share price.
Getting back to basics
Aside from the internal politics, the business does appear to be fundamentally sound. Although we’re still waiting for the release of the 2023 results (the financial year goes through to the end of February) the latest update was positive.
It upgraded EBITDA forecasts to £12.5m, from the previous estimate of £11m-£12m. If it does record a profit before tax, it would be a huge positive. Since the stock went public in 2021, it hasn’t turned a profit. In fact, last year it posted a loss of £33.9m. So to flip to a profit would be a huge step forward.
Even though the stock jumped on this news, I’d expect a further jump on confirmation of this when the results come out.
Balancing the risks
There’s huge potential reward here. The stock was above 100p as recently as summer 2022. But there are risks involved. The issues with the clearout of senior management may have damaged the reputation of the brand. I think larger institutional investors will want to wait and see how things go this year before deciding to commit and buy.
Another risk that we need to acknowledge is the competitive nature of the beauty sector. It’s dominated by larger players than Revolution Beauty. With thin margins and everyone trying to get more market share, it’s not an easy space to compete in.
But I think I’m going to allocate a small amount of money to the stock, given the large potential for the share price to recover.
