That pain could come in November.

Howdens Joinery

One FTSE stock that could have a difficult month is kitchen supplier Howdens Joinery (LSE: HWDN).

Now, I’m actually a fan of this company. It’s a big player in its market and has a history of generating above-average returns on the money it puts to work.

Unfortunately, it’s easy to overlook these qualities in the current climate. With inflation running high and a housing market now treading water, demand must surely have softened over the summer. We’ll find out when it reports on recent trading on 3 November.

The question is, how much of this is already priced in? Well, the near-halving of Howden’s share price in 2022 would suggest quite a bit. Interestingly, there also seems little interest from short sellers as things stand. This suggests that expectations might actually match reality. If so, there’s no guarantee that we will see another drop next month.

That said, I’m prepared to wait for the numbers before deciding whether to strike.

Marks and Spencer

Interim results from Marks and Spencer (LSE: MKS) will be published on 9 November. Like Howdens, its stock has tanked in value year-to-date.

I can’t say I’m surprised. Having almost overcome the challenge of shaking its tired image, the tightening of purse strings is another hurdle for the business. News that inflation returned to double-digits in September is hardly an encouraging development. A recent update from Ocado (its joint venture partner in the UK), and the reaction to it, don’t bode well either.

On the flip side, the shares look cheap, changing hands at a price-to-earnings (P/E) ratio of a little less than seven. One might also argue that M&S stands to benefit from fewer people eating out but perhaps spending a little more on eating in. And, no, I don’t believe every M&S shopper has suddenly migrated to shopping at a German discounter for their groceries.

Even so, I can’t see a catalyst for a recovery to begin in November. For this reason, I’m happy to watch from the sidelines.

AO World

Down 57%, as I type, electrical goods seller AO World (LSE: AO) has been another big casualty in 2022.

With interim results out on 22 November, I just can’t see how management has been able to turn this still-not-consistently-profitable business around. Like M&S, AO operates in a hyper-competitive environment. And while white goods and gadgets need to be replaced from time to time, many people will avoid doing so in a recessionary environment unless completely necessary.

It seems I’m not alone in being bearish. Broker Canaccord Genuity currently has a ‘sell’ rating on the stock with a target price of just 31p. It’s currently 45p.

Management is clearly trying. The decision to leave the German market and concentrate on the UK, while overdue, does make a lot of sense.

Even so, I still can’t see the attraction of me investing here. They don’t make bargepoles long enough.

But AO World has carved out a sizeable business in the digital retail space, an area I expect to grow more in future. Could its dramatic share price fall offer a buying opportunity for my portfolio?

Stuttering performance

AO World saw revenues shrink 6% last year. But they were still more than 50% larger than they had been two years previously. That suggests the company has been able to hold onto a lot of the sales gains it saw during lockdowns.

More alarmingly though, the company swung from a £20m profit the prior year to a £37m loss in its most recent 12-month reporting period. Looking ahead, the company’s chief executive said: “We certainly have more volatility to navigate.”

Reasons for optimism

Most of that sounds unreassuring. Sales are falling, the company has swung sharply into the red and we are now in a recession. This is where consumers may decide to postpone or scrap the purchase of white goods that cost hundreds and sometimes even thousands of pounds. That could hurt AO World’s sales further. If sales fall but costs do not come down at the same speed, it might also be bad news for profit margins.

However, I see grounds for optimism when it comes to the company’s future. While some white goods purchases are discretionary, a lot are not. If people move into a new home without a washing machine, for example, I think most will choose to buy one.

AO World has built a strong position in this market. It has boosted its liquidity by issuing more shares over the summer. The company is also leaving the German market. Whether or not that is the right decision from a long-term strategic perspective, I do think the move makes sense now.

AO World is battening down the hatches due to an economic storm. I think focussing on its key UK market is smart. It can always try to expand internationally again once the economy is stronger.

My move on AO World

I have confidence in the company’s management, which has done a great job building the business in recent years. If the firm rides out the recession and continues to build a strong position in the UK market for white goods purchases, I think the current AO World share price could come to look like a bargain.

But although I am optimistic, I think the risks are sizeable. The company has a limited track record of profitability. It operates in a highly competitive market. It may need to boost liquidity further if it keeps racking up losses, which could lead to more shareholder dilution.

Looking first at risks rather than potential rewards, I realise that I can invest in other retailers I think face less sizeable challenges. So I do not plan to buy AO World shares for my portfolio.

AO shares fall

As a quick reminder, AO is a retail business specialising in electrical goods and appliances for consumers’ homes. It operates in the UK and Germany. Its business model involves picking and packing goods consumers buy, before delivering them through its own delivery business as well as other partners.

So what’s happening with AO shares currently? Well, as I write, they’re trading for 43p. It is worth remembering a penny stock is one that trades for less than £1. At this time last year, the stock was trading for 212p, which is a 79% decline over a 12-month period.

Pandemic spending boosted AO shares, however since the turn of the year, macroeconomic factors have negatively affected operations and profit margins. Furthermore, recent events within the business have not helped either.

Recent events and refocused strategy

Two weeks ago, AO shares suffered once more when the firm announced it needed to raise £40m to shore up its financial position. This is rarely a positive sign so I understand why the shares fell further. It will raise the funds by selling new shares at 43p per share.

AO has confirmed the funds will be used to maintain its credit rating, which is important, as this allows it to sell stock before it needs to pay its suppliers. Furthermore, it has decided to close its troubled German operations too. Next, it has decided to venture into new product lines and discontinue others as the new strategy begins to take shape. A major aspect of the new strategy is to cut costs, which should help boost its balance sheet and improve its chances of sustained profitability.

I do understand that AO’s past performance is not a guarantee of the future, but I wanted to know a bit more before reviewing its new strategy and deciding whether to buy shares in the penny stock. I noted that it has only reported a profit in four of 11 years as a listed company. In a saturated market, it seems competitors are getting the better of AO.

A penny stock I’m avoiding

There is every chance that this cash injection, and the new initiatives to cut costs and boost growth, could reap rewards for AO. But current macroeconomic headwinds will not help. Nor will the current well-documented cost-of-living crisis here in the UK, which could result in consumers spending less on electronic goods.

I did note that full-year results for the year ending 31 March 2022 have been delayed due to the recent review. I’ve decided to keep AO on my watch list for now. There are too many uncertainties putting me off. There are better stocks out there with better fundamentals and better prospects of consistent and stable returns that I prefer.

Tullow Oil

Tullow Oil’s (LSE:TLW) share price has fallen 19.68% in the last year, while it’s down 20% in the past month. The shares are currently trading at 44p.

The company – an oil exploration and production firm – recently concluded a deal to buy Capricorn Energy. The new partnership, which started in June, is designed to create a “leading African energy company”. 

Investment bank JP Morgan hailed the deal as a step in the right direction. It further believes that the partnership will be beneficial for both oil production and reserves. The bank placed a price target of 82p on Tullow Oil, which is far higher than the current share price.  

The present economic environment is also good news for the business, because both WTI and Brent Crude oil are still trading around $100 per barrel. This essentially means that Tullow Oil’s produce is worth more than it would have been in 2020, for example.

However, between 2020 and 2021, revenue fell by around $100m. This trend is something I’d like to see reverse when the next results are published.

AO World

Secondly, AO World (LSE:AO) shares have taken a battering over the past year. In that time, they’ve fallen 81.42%, while over the last month they’re down 40%. At the time of writing, the shares are trading at 45.5p.

The company – a retailer of electrical goods – announced last month that it was embarking on a £40m capital raise through the issuance of new shares. This sent alarm bells ringing in the stock market, because investors interpreted this as a sign that the firm was struggling for cash.

The business stated that it was raising cash to bolster liquidity and to be able to take advantage of any future opportunities to grow.

In terms of results, AO World performed relatively well during the pandemic. Between the 2020 and 2021 fiscal years, pre-tax profits grew from £600k to £20.2m. 

However, with more talk of a recession looming, it seems likely that revenue could be hit as customers have less cash in their pockets to spend on electrical goods. This could be bad news for the shares.

Overall, both of these companies have faced challenges recently. It’s still unclear how broader factors, like Tullow Oil’s takeover deal or AO World’s capital raise, will impact the respective businesses. Given the uncertainty, I won’t be adding these stocks to my portfolio, but I’ll keep them on my watchlist for the future.

This week’s drop means that AO shares have fallen by 80% over the last 12 months. The stock’s collapse is a bitter blow for shareholders who bought into the AO story when the shares were trading at pandemic highs.

However, I’m wondering if AO’s new focus on lean, UK-only growth may have created a buying opportunity. Should I consider adding this stock to my Stocks and Shares ISA as a turnaround play?

Why is AO raising cash?

A newspaper report last weekend flagged up the risk that AO might need to raise cash to strengthen its financial position with trade suppliers.

The shares tanked on Monday, but by Wednesday, we had the news — AO was going to raise £40m by selling new shares at 43p.

A fundraising like this is never ideal for existing shareholders, but I think it’s a sensible decision.

Like most electrical retailers, AO is dependent on having a good credit rating with its suppliers. This allows AO to sell much of its stock before it pays for it.

If this credit relationship broke down, AO could find itself unable to buy stock in sufficient quantities. That could be disastrous for the business.

Updated growth strategy

AO had already confirmed plans to close its loss-making German operations in June. This week we’ve got more detail on the company’s updated strategy for its core UK business.

Founder and chief executive John Roberts plans to fine tune AO’s product range by expanding into some new product lines, while discontinuing others. The company also expects to make improvements to its operations in order to cut costs.

Overall, AO expects to achieve £25m of savings by March 2025. That’s equivalent to nearly 10% of last year’s operating costs, so it’s a worthwhile saving in my view.

Will AO turn a profit next year?

AO reported a record £18m profit in 2020/21, thanks to a surge in online shopping during the pandemic. But apart from this one exceptional year, AO has only reported a profit on three other occasions in its 11 years as a listed company.

I’ve often been critical of AO’s lack of profitability, suggesting that it’s too small to compete with larger rivals such as Currys and Amazon. However, I’m impressed by AO’s new focus on costs and UK growth. I think this could finally see the company become a consistently profitable business.

AO’s financial results for the year to 31 March have been delayed this year due to its strategic review. However, broker forecasts suggest a loss is likely for 2021/22 and 2022/23.

Although I’m more optimistic about AO, I’m not ready to buy the shares just yet. I want to get a clearer picture of the company’s financial position and its current performance before I make a decision. For now, AO stays on my watch list.

But the long-term growth story at AO World still has promise, in my view. So is the share price crash a buying opportunity for my portfolio?

The AO World investment case

The reason for AO World’s dramatic share price growth back in 2020 was the growth prospects investors saw from people buying white goods online. Since then, a couple of things have changed. The end of lockdowns means customers can now easily shop on the high street again. An increasingly gloomy economic situation suggests many people will delay non-essential purchases. So, for example, buying a new bigger fridge when the old one still works fine will be lower down some people’s list of priorities than it would have been a couple of years ago.

In the short term that could be bad for sales at AO World. The company’s revenues shrank 6% last year compared to the prior 12 months. It has said it remains cautious about the revenue and profit outlook in the near term. As well as growing living costs hurting demand, risks including inflation and logistics problems eating into profits.

But looking further ahead, I see reasons to like the AO World investment case. It has scaled up its business successfully. While sales fell last year, they were still 52% higher than a couple of years previously. The company is now profitable and is focussing this year on cash generation. Although customer demand may subside in a recession, the long-term outlook for white goods remains strong. AO World is well-positioned to benefit from that.

Is the AO World share price a bargain?

So, if the longer term outlook is bright, why has the AO World share price crashed?

The coming years could be tough ones, hurting profitability at the firm and perhaps forcing it to boost its liquidity. Risks such as logistics bottlenecks threaten to continue indefinitely.

The company’s price-to-earnings ratio is around 15. I do not see that as a bargain, especially as I expect the company’s earnings this year may be lower than they were last year. Despite the deflated share price, the chief executive has announced plans to sell shares this year although he retains a large stake.

My next move

Although I do not see them as a bargain, I still see potential long-term value in adding AO World shares to my portfolio. I think the growth story remains attractive and the company has a lot of scope for expansion.

But the risks are also significant. If costs keep escalating and consumer spending slows, the company may need to put its energies into maintaining its existing business rather than trying to grow. That could keep the AO World share price in the doldrums for a while. I will not be buying the company for my portfolio at the moment.

AO World

I’ve been bearish on electrical retailer AO World (LSE: AO) for, well, years. The huge spike in the share price during 2020 did little to arrest my fears that this company would struggle to outgun rivals in what’s an incredibly competitive space. Well done to anyone who managed to play this momentum game and win.

The actual date on which full-year numbers will be revealed is still to be confirmed. Even so, I think I can safely say they won’t be good. The company has already reported that customers are cancelling warranties as the cost of living climbs. I can’t imagine a lot of people are rushing to buy white goods right now either.

The question is whether this is still to be fully reflected in the shares. Despite tumbling 27% in 2022 to date and 70% in the last 12 months, I’m not sure it is.

I’m not alone. The small-cap continues to feature in the list of most shorted stocks on the UK market.

Of course, AO could bounce hard if it reports even slightly better-than-expected trading. But that level of speculation is better suited to traders rather than Foolish investors like me.

Moonpig

Greetings card supplier Moonpig (LSE: MOON) is a second growth share I’ve long been wary of due to the hyper-competitive market in which the firm operates.

Again, my cautious stance has been vindicated. Moonpig’s share price is down 37% in 2022 and 50% since last May.

This isn’t to say there’s nothing to like here. It’s got a decent brand (boosted by that memorable jingle) and has been busy building a more diversified selection of gifts on its site. The company also upgraded its revenue target for the year from £285m to roughly £300m back in April.

However, a valuation of 20 times earnings still strikes me as rich considering the lack of ‘economic moat’ (as Warren Buffett would say). Customer loyalty levels may be above pre-pandemic levels but that may reflect the migration of shoppers online rather than anything about Moonpig specifically.

Naked Wine

Like AO World, drinks seller Naked Wine (LSE: WINE) was a huge beneficiary of the multiple UK lockdowns. Understandably, that purple patch could only last so long. Accordingly, this growth share is down 43% in 2022 and almost 60% in one year.

There’s an argument that a bottle of wine is just the sort of cheap luxury that people will treat themselves to in tough economic times. Once again, however, I’m struggling to discern any true advantage over rivals. For many people, I imagine a bottle of plonk from the nearest supermarket may suffice. I could be wrong, of course, and ominously, Naked Wine also appears on the list of most-shorted stocks too.

I can see things getting worse before they get better for the Norwich-based business.

Full-year numbers are due on 9 June.

70% down! 

Online electrical-goods retailer AO World (LSE: AO) was a huge beneficiary of the multiple UK lockdowns. The once-in-a-lifetime pandemic temporarily turbocharged revenue at the Bolton-based business and nimble investors charged in while the going was good.

Since then, however, it’s all been downhill. In fact, the share price has now crashed 70% in the last 12 months. If anything, this highlights the risks involved in buying single company stocks lower down the market spectrum. It also serves as evidence that not every online retailer will thrive. 

As someone who isn’t afraid to adopt a contrarian mindset in the pursuit of long-term gains, I’m pushed to ask whether such a huge fall in the share price is justified. Regrettably, I think it is. In fact, I think the outlook looks increasingly bleak for the shares.

Strategic review

Last month’s Q3 update hardly inspires confidence. While UK revenues were “broadly stable” on a one-year comparative, the company is clearly finding things a lot harder in Germany. According to AO World, trading in the latter has been “significantly impacted” by a toxic mix of increased competition, higher marketing costs and supply chain disruption. Since these trends are expected to continue “for the foreseeable future“, it’s now conducting a strategic review of this division.

If AO World had a global presence, such a move wouldn’t worry me so much. But knowing that Germany represents its only other market — ironic given the company’s name — is deeply worrying.

Shorters assemble 

It’s not just me thinking things could get even tougher for AO World. Right now, the battered growth stock is the fifth most shorted company on the London Stock Exchange. In other words, a significant number of people are betting that the share price still has further to fall. 

For balance, it’s worth remembering that shorters can sometimes be spectacularly wrong in their judgement. If trading recovered then those betting against the company would be forced to close their positions as quickly as possible to avoid huge losses. This activity, when combined with long-only investors piling in, could theoretically lead to this FTSE stock’s value exploding. AO World’s small free float (the percentage of a firm available to buy and sell on the market) might help to move the needle to an even greater extent.

How likely is this to happen? The odds aren’t great based on what I’m seeing.

Better bets than this FTSE stock

Now, AO World can talk all it wants about the rise in online shopping. To stand a chance of making me money, however, I need to see that it’s taking the battle to the substantial competition it already faces. The trouble is, I’m struggling to spot the ‘moat’ that master investor Warren Buffett advises we all hunt for.

If I were looking to invest my finite capital in UK growth stocks today, I’m certain that this FTSE stock wouldn’t get on my buy list. Why take the chance here when I can buy quality companies like these that should compound in value over many years instead?

AO World demoted from FTSE 250 index

AO World is a retail company specialising in electrical goods and appliances for the home. These appliances include TVs, washing machines, fridge freezers, dishwashers, and more. It operates in two key markets, the UK and Germany. Once sold, AO picks and packs goods at its warehouse facility before delivering them through its own in-house delivery business as well as other logistics partners.

When the pandemic began in 2020, many consumers were unable to spend money on leisure activities and holidays. This meant many turned to home improvements including purchasing new appliances. In addition to this, with the demand for housing outstripping supply, demand for such products was evident too.

At the beginning of 2021, AO shares were riding high at 429p per share. By the close of the year, shares had reached penny stock levels at 100p. 2020 was an excellent year for the AO share price as it rose from 90p per share to over 400p. It is worth noting that at the time of writing, AO World has been demoted from the FTSE 250 index.

What happened in 2021?

As 2021 went on, macroeconomic factors began to take their toll on AO. The well documented supply chain crisis will have affected the availability of its products. This will have led to disrupted operations and loss of custom. In addition to this, AO also suffered from the shortage of HGV drivers in the UK related to Brexit. Having difficulty in fulfilling orders for customers can often lead to them looking elsewhere. Finally, rising costs across the economy and businesses will have impacted performance. All of these factors will have affected performance and investment viability as well its eventual demotion from the FTSE 250.

AO released an interim report in November for the six months ended 30 September 2021. This report was a mixed bag which did not help the ailing share price. Revenue came in at £760m, which is a 67% increase compared to pre-pandemic 2019 levels. Customer numbers were up and new warehouse facilities had opened throughout the UK and Germany.

Despite AO recording impressive revenue, the same could not be said for profit. AO reported a loss for the interim period. In addition, net debt increased too. It is worth noting that AO is in a saturated market where competitors try to outmanoeuvre each other with lower pricing. This often places pressure on profit levels, making them very slim. Most tellingly, AO said the outlook for the full year was bleak. Revenue growth would be between -5% and 0%. Profit was forecast at £10m-£20m compared to £28m in 2020. In addition to this, AO’s German business has seen an increase in competition. This will not have helped the ailing share price as Germany is a key growth market for AO.

Final thoughts

Reviewing a turbulent 2021 for AO World, the falling share price makes sense. Macroeconomic factors, coupled with falling profits, have meant many problems have arisen a the same time for the former FTSE 250 stock. Its investment viability has taken a major hit in 2021. 

Here are two penny stocks I’ve been considering this month.

A penny stock to buy

I’ve been looking at Creightons (LSE: CRL) as a potential buy for my portfolio. It’s a developer and manufacturer of toiletries and fragrances for its own brands and also private labels. It provides outsourced manufacturing for third-parties too.

The share price is 97.5p as I write, so only just in penny stock territory. In fact, as recently as September the share price was around 130p. I view the stock decline as general market weakness, and not about anything specific to the company’s performance.

Even though Creightons is a penny stock today, with a market value of only £68m, the company is showing signs of being a quality operator. For example, it’s able to generate double-digit returns on its capital. It has been able to increase its operating margin almost every year from 2012 when it was as low as 1.6%. In the company’s fiscal year 2021 (the 12 months to 31 March 2021) the operating margin had improved to 8.8%. These are key characteristics I look for before investing in a company.

The growth has also been impressive of late. Revenue grew 29% in Creighton’s most recent year, and profit increased further by 37%. Some of this growth was from sales of hand sanitiser due to the pandemic, so may be considered a one-off. This may mean that revenue growth slows, so it’s a risk to keep in mind.

One further risk to consider is the lack of analysts covering the stock as the company isn’t large enough to warrant professional research. Therefore, I have to be confident in my own forecasts before I invest. 

But on balance, I like the potential here. I’m considering this penny stock for my portfolio.

And one to avoid

I also came across AO World (LSE: AO) as a potential penny stock investment. It’s an electrical products retailer operating across Europe and offering a range of kitchen appliances and home electricals.

Revenue growth has been impressive in recent years, so there might be a good investment case here.

However, the company has only recently become a penny stock as the share price dipped to 95p at the end of November. The price was over 400p at the start of 2021, so something must have gone wrong.

Well, in the most recent half-year results to 30 September, the company said it made an operating loss of £11m. This was down from a profit of £16m in the same period one year ago. The company said it built up its cost base as it expected revenue growth to continue. Multiple issues now mean revenue will be flat or even potentially decline by 5% for the full year.

The company has really suffered due to supply chain constraints and cost inflation recently. I don’t expect these problems to ease for a little while longer. So, as it stands, I won’t be investing in AO World until I see some evidence that these issues are easing. If they do, I’ll revisit the investment case here.