Penny stocks are often seen as risky investments. I like to look for these small-cap contrarian options for my holdings. One could be a diamond in the rough and offer me lucrative returns in the longer term. Here’s one pick I would add to my portfolio today.
Former penny stock on the rise
The Shoe Zone (LSE:SHOE) share price has been surging recently. As I write, the shares are trading for 1,42p. At time last year, the shares were very much in the penny stock category, trading for 51p. A return of 178% over 12 months is impressive.
Shoe Zone is a men’s, women’s, and children’s shoe retailer with over 500 stores in the UK and Ireland, and employs 4,000 people. In light of the recent e-commerce boom, it also has an online store and offering which is vital to success due to the changing shopping habits of consumers as well as evolving technology.
Why I like Shoe Zone
Retail and the high street have taken a beating over the past few years. Online disruptors to the retail market coupled with more choice have placed pressure on bricks-and-mortar retail. The tide seems to be turning somewhat, however. Recent economic conditions such as rising inflation and energy costs as well as the pandemic has placed pressure on the wallets of many households. Budget retailers like Shoe Zone seem to benefiting. Shoe Zone’s extensive store presence coupled with its online offering provide it with a good platform from which to reap the rewards of the need for budget footwear.
Shoe Zone’s performance recently and historically has been promising. I do understand past performance is not a guarantee of any future performance, however. Looking back, revenue increased year on year for three years prior to the pandemic affecting 2020 results. Most recent audited full-year results were released earlier this month. Before the audited results were released, the initial update in October caused the share price to surge and the Shoe Zone share price to surpass penny stock levels. Revenue was very close to 2020 levels which is encouraging due to 2020 trading being disrupted. Tellingly, online revenue increased substantially compared to 2020 levels. 2020 was a loss-making year whereas in 2021, Shoe Zone recorded a £14m profit. A big bonus for me as a potential investor is the company is debt free.
Risks and final thoughts
The biggest threat to Shoe Zone’s progress in 2022 and beyond is that of the pandemic. Many of its stores were closed when restrictions were tightened earlier in the pandemic. With the threat of new variants and fresh restrictions still lingering, this could impact the balance sheet and share price performance.
Overall I think Shoe Zone could be a good addition to my holdings and I would buy shares today. I wish I had bought them sooner when they were still a penny stock. I expect trading in the months ahead to be excellent, barring any restrictions, and would not be surprised to see 2022 results surpass 2021 and pre-pandemic results. At current levels, the shares look cheap too with a price-to-earnings ratio of just 10.