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RC365 is a penny stock again! Should I act now and invest?

British Pennies on a Pound Note

The RC365 Holdings (LSE: RCGH) share price has been on a rollercoaster ride over the last few weeks. Starting in June, it rose an incredible 600% to reach 165p, before plunging 70% in five weeks. Now, it’s back in penny stock territory at 50p.

Does this savage share price correction represent a timely buying opportunity? Let’s take a look.

A popularity contest

In his 1987 letter to Berkshire Hathaway shareholders, Warren Buffett wrote: “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” This famous market metaphor was originally used by Buffett’s mentor Benjamin Graham.

Put simply, it means that a company’s market value can sometimes be decided by how popular or unpopular its shares are in the short term. During times of exuberance, the price is driven by speculation and usually some sort of compelling story. The stock essentially becomes part of a popularity contest.

By contrast, when the market behaves like a weighing machine, investors focus on the fundamental characteristics of a business. This will include its profitability, financial strength, earnings growth potential and competitive advantages (or not).

I think that perfectly sums up what we’ve seen with RC365 stock in recent weeks. The popularity contest which sent it flying appears to be over (at least for now), and the company has little in the way of fundamentals to sustain its extreme market valuation.

Macro headwinds

As a recap, RC365 offers IT solutions and the provision of secure payment gateway solutions to customers in Hong Kong and China. While that undoubtedly seems an attractive market to be in long term, there’is a lot of worry about the Chinese economy right now.

After decades of strong growth, the Asian country currently has a youth unemployment rate above 20%. Meanwhile, its housing market is reported to be on its knees and consumer spending is relatively weak.

As a result, investor sentiment around China and the wider region is very low. That’s not a good backdrop for RC365, a growth company tied to the economic health of China and Hong Kong.

Will I buy the fallen shares?

Now, I should mention that the company is attempting to diversify its business geographically. On 3 August, its subsidiary RCPAY signed an agreement with a company registered in Malaysia to issue and manage Mastercard prepaid cards.

Further, on 14 August, the fintech firm signed a non-binding agreement with YouneeqAI Technical Services to use its technology in the UK. This is a US-based company operating an artificial intelligence platform focused on product customisation and recommendations. RC365 is funding this deal by issuing 6m new shares.

While these latest deals sound encouraging, I won’t be investing in the shares. That’s because even after its 70% collapse, the stock is trading at 40 times sales. Most stocks are considered expensive if they trade at 40 times earnings, let alone sales!

To my eye, there are far superior penny stocks in the UK market right now.

The post RC365 is a penny stock again! Should I act now and invest? appeared first on The Motley Fool UK.

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More reading

  • Could RC365 shares be a ‘pump and dump’?
  • 3 things that could make me buy RC365 shares right now
  • RC365 share price crashes: it may have further to go! Here’s what the charts say
  • AI: Should I buy RC365 shares instead of Nvidia shares? What do the charts say?
  • Beware the RC365 share price bubble

Ben McPoland has positions in Mastercard. The Motley Fool UK has recommended Mastercard. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.