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Could this falling penny stock be perfect for growth and returns?

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One falling penny stock that has caught my eye recently is SIG (LSE:SHI). Despite its recent drop off, is there a chance it could recover to boost my holdings? Should I look to buy the shares at a cheaper price now?

Building supplies business

SIG is a specialist building supplies firm that produces products such as insulation, roofing, and other interior products. It has a worldwide presence, supported by its close to 8,000 employees.

As I write, SIG shares are trading for 32p, putting them in penny stock territory. A year ago, the stock was trading for 47p, meaning it has seen a 31% decline over a 12-month period. It is worth mentioning that many shares have fallen in recent months due to macroeconomic headwinds and the tragic events in Ukraine.

Challenges to note

As mentioned above, macroeconomic and geopolitical issues are negatively impacting SIG shares. I believe these same challenges could affect investor sentiment, as well as performance and returns, for some time.

Soaring inflation has led to a rise in the cost of raw materials. For a producer of goods like SIG, this is bad news. Rising costs could put pressure on profit margins. A hike in prices could result in customers looking elsewhere for cheaper alternatives.

Spending on building projects may also slow down. This could have a detrimental effect on SIG’s demand, balance sheet, and returns.

The positives and my verdict

SIG released a half-year report for the six months ended 30 June 2022, which I found to be positive. Revenue, like-for-like sales, operating profit, and margin all increased compared to the same period last year. SIG did point to inflationary pressures but said it was able to mitigate the impact due to its high standard of products and service.

Next, although fears of shorter-term demand issues loom large due to the current volatility, I believe SIG could experience heightened demand and growth longer term. This is because, as a whole, the European construction market is a growing one. A prime example of this is the current UK housing market. Demand is outstripping supply so many house builders are looking to fill this void. SIG’s products are essential for many aspects of construction, so it could benefit here.

Finally, SIG’s insulation products could drive growth for the company. This is because rising energy bills across the world, especially here in the UK, will mean many turn to these products to help with the cost of these bills. SIG could experience increased demand, which could boost performance and returns.

To summarise, I believe SIG could be in line for decent growth in the longer term. Its recent trading update is a step in the right direction. Despite that, for me, there are currently too many ifs and buts linked to SIG’s success, especially in the face of such severe economic volatility. I will keep SIG shares on my watch list for now, but I believe there are better penny stock options for my holdings.

The post Could this falling penny stock be perfect for growth and returns? appeared first on The Motley Fool UK.

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Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK 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.