Are Woodbois shares worth me buying at 4.7p?

Jon Smith considers the recent surge in price for Woodbois shares, and wonders if the move lower last week represents a buying opportunity.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A graph made of neon tubes in a room

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

The Woodbois (LSE:WBI) share price has been on a rollercoaster ride recently. A month ago, Woodbois shares were trading at 4.45p. The price hit 8p on the first Wednesday in May, before closing last week at 4.7p. It’s down over 21% in 12 months and with most of the recent surge now gone, should I buy the shares for a second potential jump?

Reasons for the surge

It’s important to understand why Woodbois shares jumped so much in a short space of time. To begin with, the company is a penny stock with a low market capitalisation. According to my calculation, the market cap at the moment is £90m. When the market cap is low, erratic price movements can be triggered easily. If I bought £1m worth of the stock, it would cause a far greater move higher than if I bought the same amount of shares in a large-cap stock from the FTSE 100.

Therefore, when this move started to take off, the frenzied buying activity from retail investors and others quickly pushed the price even higher, given the size of the market cap at the time.

Another more fundamental reason for the jump is the impressive Q1 results that were put out a month ago. Revenue jumped 22% versus the same quarter last year, with it also being the best quarter for volume of product shipped since before the pandemic.

The outlook for the rest of the year likely helped Woodbois shares move higher. The update noted that “we expect the business to increase both scale and profitability during 2022 as new production capacity comes on-line and assuming shipping returns to more normal patterns.”

Finally, a paid ad that appeared high on the online search results claimed that a 1,000% share price increase was due. Unfortunately, this lacked any real analysis, yet could have helped drive the price higher speculatively.

Should I buy Woodbois shares now?

The fact that the surge has now almost completely re-traced makes me very sceptical about investing. To me, it’s a classic sign of a speculative move, driven without any real substance.

Sure, the Q1 results were positive, and merited a move higher. Yet to almost double in price in a few weeks feels very unnatural to me. I think many investors bought Woodbois shares to make a quick buck and have now sold out. This isn’t The Motley Fool approach to investing.

Granted, the price-to-earnings ratio sits at just 1.62. This is a very cheap level and could suggest that the stock is undervalued. Yet this is based on the profit from 2021. In the three prior years, the business was loss-making.

Finally, I’m in no way an expert in the sector that Woodbois trades in. It’s an African-focused forestry company. It produces and trades hardwood products globally. I’d really need to do a lot more research before I’d feel comfortable buying. On that basis, I won’t be investing, even at current share price levels.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Jon Smith and The Motley Fool UK have 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.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »