Penny stocks often experience more volatility than stocks of larger, established companies. This has been the case with McBride (LSE:MCB) in recent months. I believe it could be an excellent recovery play for my portfolio, however. Here’s why.
McBride is a leading European manufacturer and supplier of private label and contract manufactured products for the domestic and professional cleaning and hygiene markets. It operates across five divisions. These are liquids, unit dosing, aerosols, powders, and Asia Pacific. It sells over 1bn products a year and supplies its products to 49 out of Europe’s top 50 grocery stores.
Penny stocks are those that trade for less than £1. As I write, McBride shares are trading for 57p. At this time last year, shares were trading for 80p, which is 28% higher than current levels. In the past six month, the shares have fallen over 30%.
I believe the McBride share price dip can be attributed to the ongoing supply chain crisis as well as rising inflation and costs.
Long-term recovery opportunity
Firstly, the pandemic has shone a new light on the need for cleaning products and exemplary hygiene. The virus and the spread of it has encouraged more people to consider their hygiene and cleanliness habits. McBride should benefit from this boosted awareness and demand for its products.
Next, the economic uncertainty that came with the pandemic, such as the market crash, has seen consumers flock towards cheaper alternatives of products. Cheaper does not always necessarily mean inferior quality, particularly in the cleaning sector. McBride’s products are often own label cheaper options compared to premium branded products.
In addition to demand and McBride’s place in the market, I can see it has a favourable track record of performance. Many investors avoid penny stocks due to lack of history or comparable performance. I must note that past performance is not a guarantee of future performance. For the past four years, between 2018 and 2021, revenue stayed consistently close to the £700m mark. Furthermore, gross profit increased between 2018 and 2020.
Looking at McBride’s most recent update reported last week, it mentions price increases that most of its customers are taking onboard. McBride expects to report a loss for its half-year period, ending December 31 but it reinforces that it has a £80m cash rich balance sheet to help navigate current headwinds.
Penny stocks have risks
The rise in cost of raw materials, especially those needed for cleaning products, is a worry for McBride. As last week’s trading update mentioned, these costs are being passed onto customers. Sometimes this is not well received and can result in a loss of customers or customer confidence. In addition to this, the supply chain crisis could affect operations and performance too.
Overall I expect McBride to recover in the longer term. I believe current macroeconomic issues are short to medium-term issues. McBride’s business model and demand for its products should see its profit rise nicely over time and its share price increase and provide me with a healthy return. I invest for the long term so expect some potential bumps in the road at the moment. At current levels I would add McBride shares to my holdings.
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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.