Penny stocks can often grow into larger established stocks and generate impressive returns. Before that point, they possess greater risks with their low market capitalisation and lack of information in some instances.
Foxtons is an estate agency originally founded in 1981 in Notting Hill, London. It has grown to be London’s leading estate agency with multiple branches throughout the city and it’s website receives approximately 10m visits a year.
Penny stocks trade for less than £1. As I write, Foxtons shares are trading for 40p. A year ago, the shares were trading for 48p, which is a drop of 16% across a 12-month period. It is also worth noting that the Foxtons share price has returned to its pre-pandemic level, which was 90p just before the market crash in 2020.
Why I like Foxtons
Firstly, Foxtons has a strong competitive advantage due its profile and brand recognition. The London property market is very saturated so establishing itself as the leading estate agent in the city is a remarkable achievement in my eyes. It also continues to grow and open new branches throughout the city to capitalise on the current booming market.
Right now, the housing market is booming and Foxtons is benefiting. The government’s stamp duty holiday aided this boost. Foxtons is also shrewd as it understands that buying and selling houses can be profitable, but it is also cyclical. The boom may not last for long or may disappear and re-emerge. To combat this, it also has a burgeoning lettings division. Buying property in London is tough due to high prices, therefore lettings are on the rise. Foxtons can take a slice of rent from lettings properties it manages, which is a guaranteed form of revenue.
Foxtons also recently completed an acquisition of smaller competitor, Douglas and Gordon. This will also help boost its revenue. I like when a company acquires a competitor to enhance their profile and offering. This is a statement of intent when it comes to boosting growth and performance, especially for a penny stock with less financial clout.
Speaking of performance, at the end of October, Foxtons released an update for the nine months ended 30 September. These results were positive. Group revenue increased 50% compared to 2020 levels and 24% compared to 2019 pre-pandemic levels, which is impressive. Each of its segments — lettings, sales, and mortgage brokering services — saw increased performance compared to 2020 and 2019 levels.
Penny stocks have risks too
Foxtons is still a relatively small business and the property market is a huge machine with many cogs. A larger competitor with more financial muscle could eat away at its market share if it wanted to do so. Furthermore, the housing market is cyclical as mentioned. Any downturn or negative news could affect performance.
Overall I feel Foxtons would be a good addition to my portfolio in 2022 and I would add the shares to my portfolio at current levels. It possesses a good competitive advantage, has made the most of the recent boom, and is taking steps to grow even more. I would buy the shares and hold them for a long time.
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Jabran Khan has no position in any of the shares mentioned. 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.