Penny stocks haven’t had the best run of late. Being part of the most volatile segment in the stock market has unsurprisingly caused most of these tiny businesses to be pummelled into the ground by panicking investors.
Just looking at the FTSE AIM All-Share shows the extent of the damage, with the index dropping by over 36% in the last 12 months. By comparison, the FTSE 100 is only down by around 8% over the same period.
But it’s honestly not all that surprising. The small scale of these enterprises makes them incredibly susceptible to the effects of a potential recession. Even more so for the ones that still reside in the realm of unprofitability, let alone generate a meaningful revenue stream in the first place.
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While the painful volatility investors have endured throughout 2022 so far is technically a stock market correction, it certainly feels like a crash. And things may continue to get worse from here. Yet, after all the panic-selling this year, some top-notch companies are trading at dirt-cheap discounts, even in the world of penny stocks.
With that in mind, I’ve spotted one penny stock I believe looks like a bargain for my portfolio as prices continue to tumble.
One of the best penny stocks to buy now?
Recessions are bad news for most businesses. But some sectors have higher levels of immunity to their adverse effects due to sustained demand even when the economy is in the toilet. That certainly seems true for Water Intelligence (LSE:WATR).
The group provides minimally invasive tech-driven leak detection and repair services for commercial and residential properties. Its franchise-driven business model has kept costs low even as it actively expands its network of locations.
Despite this, the stock has collapsed 50% over the last 12 months. However, investors may be left scratching their heads when comparing the share price momentum with the underlying business performance.
Why? Because Water Intelligence seems to be smashing it! Looking at the latest results, revenues have grown by 44% while underlying profitability expanded by 15%. What’s more, with cash flow generation remaining strong, the group has amassed a sizable $21.9m cash war chest in the bank.
Needless to say, double-digit growth paired with strong liquidity is a beautiful sight in today’s market.
Nothing is risk-free
Over the last couple of years, management has begun re-acquiring its top-performing franchise locations to fuel growth. So far, the tactic seems to be working. But it has amassed some goodwill as well as debt in the process.
The goodwill balance now represents a large portion of the firm’s total assets, suggesting the group may be overpaying during these acquisitions. And if these deals fail to live up to performance expectations, it could compromise long-term value for shareholders.
Its debt isn’t too substantial and has the advantage of fixed interest rates until 2027, at 4.9%. However, raising additional capital could prove more expensive, potentially hampering growth in the near term.
Having said that, the long-term potential of this penny stock remains intact, in my eyes. That’s why it’s currently near the top of my watchlist. And may end up becoming a member of my portfolio in my next round of capital injection, especially now that the stock price has fallen by so much.
