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How can I buy Woodbois shares when I don’t understand them?

Young Caucasian man making doubtful face at camera

Investors can’t seem to take their eyes off Woodbois (LSE: WBI) shares, which are now trading for pennies. It’s one of the most read about stocks on the Fool.

After spiking to 8p per share in early May, they have gone into a precipitous slide. Today, they trade at 2.45p. I can see the appeal to contrarian investors. We all dream of buying cheap and selling high, but don’t want to go broke on the way.

The danger is that I buy cheap, and sell even cheaper. If Woodbois shares fall to 1.25p, for example, I will have lost half my stake. I could lose all of it.

Woodbois shares are a gamble

My first worry is that this stock operates in a sector I know little about. Forestry, timber trading, reforestation and voluntary carbon credits are new to me. Woodbois therefore fails Warren Buffett’s rule about never investing in something you don’t understand. Still, rules are made to be broken, I’m told.

Yet I also don’t understand why an AIM-listed stock with a market cap of just £54m has captured so much attention. True, revenues have been growing sharply. First-half results, posted in July, showed an increase of 38% to $11.3m.

Gross profit margins climbed from 20% to 23% year on year, which management pinned on “economies of scale and a focus on higher margins sales”.

August figures show Woodbois posting its first-ever operating profit, $15,000. Not much, but a step up on last year’s $700,000 first-half operating loss. It also recorded cash inflows of $200,000, against outflows of $2.2m last year. 

Looking at those figures, I’m wondering why the stock has fallen so far, and I’m scared I’m missing something. Perhaps investors were spooked by the rate at which Woodbois has been issuing shares to fund its expansion, diluting existing investors.

Woodbois had a cash balance of $2.1m on 30 June and management says it is on track to deliver strong revenue and profitability growth in 2022. The direction of travel is positive, but the company remains vulnerable to setbacks.

I’ll play safe on this one, thanks

I’m always wary when investors latch on to stocks like these, fearing a get-rich-quick mentality has taken hold and that rarely ends well. As an outsider, it’s so hard to get a grasp of the “challenges” management talks about. Or the opportunities, for that matter. There just isn’t the information available that I can find when researching FTSE 100 shares.

Many of the usual metrics simply do not apply either, such as price-to-book value, prices-to-earnings ratio, dividend cover, whatever.

I harbour painful memories of how retail investors convinced themselves that North Yorkshire-based potash miner Sirius Minerals was going to make their fortune. I got sucked into the excitement, and lost heavily.

Private investors are in constant danger of getting lured into small growth stocks with talk of big profits further down the line. I’m worried every time I see it. Right now, the FTSE 100 is packed with stocks I do understand, many trading at low valuations, with terrific yields and years of making profits. I’m going to stick to them.

I would only be willing to invest money into Woodbois if I was willing to lose it. Right now, I’m not in that position.

The post How can I buy Woodbois shares when I don’t understand them? appeared first on The Motley Fool UK.

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Harvey Jones doesn’t hold any of the shares mentioned in this article. 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.