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As a dumb investor, I have to say that I love hunting for bargains. Penny stocks have always piqued my interest due to their small size and typically higher level of price volatility.
Penny stocks refer to companies with a market capitalization of less than £100 million and a share price of less than £1.
worth a penny
One that caught my attention this week was Revolution Beauty Group (LSE: REVB). It is a global, multi-category, massive beauty and personal care business. I like that the company is diversifying its wholesale retail relationships, as well as operating with a clear digital sales strategy.
Revolution Beauty shares have skyrocketed 10% in the last week alone. Shares in the AIM-listed beauty retailer are trading at 29.5p with a market capitalization of £93m. In its most recent interim results, the company reported adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of £6.4 million from £90.4 million.
Recent update
The company recently held its Capital Markets Event on February 8 with a brief update for investors. One thing that stood out was its diversified global profits across the US (27% of sales), the UK (34%) and the rest of the world (39%).
Revolution Beauty’s “fast to market” content model is also a highlight in my books. The company has focused on delivering engaging content quickly to maintain and capture additional market share.
While there are many things to like about Revolution Beauty, investing always comes with risks. I think penny stocks, in particular, warrant more due diligence given their small size and often significant price swings.
A key risk I can see is that Revolution Beauty is very consumer-oriented. While the company's recent Capital Markets filing shows a global beauty market worth $460 billion (and growing), I'm wary of companies that sell direct to consumer. People like to spend on cosmetics, which account for 78% of the group's sales, but that can be tested when times get tough.
Companies tend to be more resilient and reliable from a customer perspective. Given the current economic climate, including increased cost of living pressures, we could see consumers reducing their spending on beauty in favor of basic needs.
E-commerce vs. physical stores
The other thing that catches my attention is the high profit percentage of physical retail stores. Revolution Beauty reports that 80% of its profits come from physical retail and 20% through digital means.
With the rise of electronic commerce and companies like Amazon, traditional retail has been under pressure in recent years. However, a big positive is that real estate is not a significant part of the business, with property, plant and equipment accounting for £7.9m or 6.0% of total assets in FY23.
Strong gains over the past week indicate that other investors are buying Revolution Beauty stock. I like the business aspect, but I'm wary of the consumer-facing element if we see more recessionary conditions.
All in all, I am willing to bide my time and consider buying when I see the company's next earnings release to allay my concerns.
