A couple of months ago, fellow Fool Royston Wild identified a penny share whose price he thought could provide “a great dip-buying opportunity”. After that, the penny share in question rose 18% in several weeks.
But the share has since fallen back to where it was a couple of months ago. So, could this again be a dip-buying opportunity for my own portfolio?
Well-known player in booming market
The penny share in question is SIG (LSE: SHI). It’s up 38% over the past year, at the time of writing this article Monday. The company provides building materials to contractors in various European markets. It is best known for its specialisation in insulation. It has had a very challenging few years. The pandemic affected sales, but the company already looked fragile to me even before that. Last year there was a rights issue. That came little more than a decade after SIG had considered a rights issue in the aftermath of the last financial crisis. So it seems to me that SIG has some challenges in terms of business demand across the economic cycle. When custom drops off, the company seems to be underprepared.
However, since its problems last year, SIG has been building back to a position of strength. In a trading update last week, the company said that it had continued to trade ahead of expectations in its fourth quarter. That is encouraging news and bodes well for the full-year results at SIG. A full-year trading update is scheduled for 11 January.
Last month the company tapped the debt markets to refinance itself. That should help it streamline its balance sheet, as well as provide funds to help the company grow. Several directors bought shares in the company last month. They paid 49p or 50p, higher than yesterday’s SIG share price.
Why I like this penny share
SIG has historically had periods of considerable success. It understands the insulation market well.
I see a couple of growth drivers for insulation in Europe in coming years. First, in markets such as the UK, there continues to be a housing shortage. That is leading to extensive construction of new homes. That will provide high demand for materials including insulation.
On top of that – and potentially even more importantly, in my opinion – many European governments are pushing insulation as part of their environmental strategy. Greater use of insulation could be one way to reduce energy use, including in older buildings. I think that will lead to sustained demand for insulation materials, and some of it may not be very price sensitive if it is government-mandated.
I do see risks here, too. Supply chain costs and labour costs have been increasing sharply in many markets. That could lead to higher costs, which might reduce SIG’s profitability. I also think the rights issue last year is a reminder that any future downturn in building activity could again threaten liquidity. That might lead to further shareholder dilution.
But as a leading player in a market with strong demand, I think the next several years could see a growing SIG share price. I would consider adding the penny share to my portfolio.