The case for investing in this penny stock

When looking at a small-cap penny stock one of the things many private investors want to see is management holdings, as well as (of course) the business’s financial performance. On this front, I think Sosandar measures up well. Alison Hall, the co-founder and current joint CEO, has around 5% of the shares. On that basis management incentives are well aligned with shareholders. She’ll presumably want the share price to go up!

Talking of investors, the company has a number of very reputable institutional investors among its biggest holders, including Octopus, Amati and Schroders. Another reassuring sign I think. 

Sosandar said last month that revenue had soared in the three months ended 31 December, leading the group to a record quarterly performance. Revenues were up 122% year-on-year in the third quarter at £8.85m. This will move it towards profitability, which I think will make it seem like a much better investment.

Analysts at Singers see potential for Sosandar to achieve £75m-£100m revenues and a more than 10% EBITDA margin, within the next couple of years, indicating the potential for massively improved financial performance in the coming years.

The retailer could also expand overseas. Management has spoken of a “massive opportunity” to expand overseas via third-parties. Again, this could really boost organic growth and help lift the company into profitability.

Overall, to answer my earlier question, I think the phenomenal revenue growth could continue and increasing economies of scale and repeat custom could make this a much higher-quality, profitable business. In turn, I’d hope to see that translate into strong share price growth.

The bear case

There are still issues though. The company right now is loss-making. That will put off some investors. Fashion is also notoriously risky as new products are launched every season and could fail to spark. The biggest risk is the shares aren’t cheap, especially because it’s an unprofitable business. Furthermore, if something goes wrong, and revenue growth stops, the share price would very likely plummet.

Weighing the scales

The rapid growth of e-commerce in recent years hasn’t helped it move into profit just yet. But the business is moving in the right direction and is relatively young, while the top line is growing fast. 

As a penny stock with a £60m market cap, there’s a lot of room for Sosandar to become much bigger than it currently is. It operates in a massive market with lots of potential customers, so while there is competition, there is also a huge opportunity. If I weigh up the risks versus the rewards Sosandar looks to be heavily weighted towards future share price growth as and when it becomes profitable. For that reason, I’m considering adding the shares to my portfolio. I think Sosandar might be a bit of a hidden gem.  

Meteoric rise

A lot has been written about the death of the high street shopping experience in recent years. Many established retailers have fallen by the wayside in recent times. The pandemic has exacerbated this and consumers find themselves clothes shopping online more than ever. The rise of online-only fast fashion firms has taken the world by storm. This has been supported by technology evolving rapidly too.

Sosander was established in 2016 and joined the FTSE AIM just a year later. It is a women’s fast fashion brand selling clothes and accessories for a multitude of occasions and day to day wear too. Impressively, it has lucrative partnerships with established firms such as Next and Marks and Spencer.

Last year was an impressive one for Sosander. The share price rose 82% in 2021 from 17p per share to current levels of 31p.

Why I like Sosander

My bullish stance towards Sosander stems from two main aspects. These are macroeconomic factors and internal company factors. I believe both of these could favour its growth trajectory and make it one of the most exciting penny stocks on the market for 2022 and beyond.

From a macroeconomic perspective, online fast-fashion is a booming market that will only continue to grow. The impact of the pandemic has been largely positive on a burgeoning industry. Many other online fashion firms have reported record customer numbers and sales. This new way of life could continue and the pandemic shows no signs of disappearing too. Firms like Sosander will benefit in my opinion.

From an internal company perspective, I like Sosander due to its company structure. It is a relatively small firm, which means a lot of insiders own stock. I am usually buoyed when insiders own significant amounts of stock. This tells me their interests are aligned as they want a return on investment on their own money and can make it happen by helping the company succeed. In addition to this, who better than insiders to know whether a firm is on an upward trajectory. I keep an eye out for insiders buying shares.

A positive trading update released today by Sosander for the three months ending 31 December made for excellent reading too. Revenue was up 122% compared to the same period last year. Active customers and average orders also increased compared to the same period last year.

Penny stocks have risks too

Sosander is a relatively small firm in a big industry. One concern is that it could get out muscled by larger, more established competition. Secondly, when small companies try to grow rapidly, there are often growing pains. These can be such things as technological and infrastructure related so I must be wary of these issues. Both risks can impact performance and any return on my investment if I bought shares.

Overall I believe Sosander is heading for an excellent 2022 and beyond. It is an exciting penny stock that had a breakout year in 2021. I am buoyed by its progress to date including its excellent strategic partnerships as well as recent trading. Favourable market conditions should help too. I would add shares to my portfolio at current levels.

Fast fashion multi-bagger

The penny stock in question is Sosander (LSE: SOS). Providing “a one-stop online shop for style-conscious women who have graduated from price-led alternatives”, the company also boasts brand partnerships with FTSE 100 firm Next, FTSE 250 member Marks & Spencer, and John Lewis. Just like the aforementioned Boohoo and ASOS, Sosander makes full use of data analysis to gauge which products it should prioritise and the best ways of reaching its target audience. 

Despite only being around since 2016, the company was listed on AIM only a year later. Performance since then has been somewhat erratic. For example, the share price went from 45p in September 2018 to just above 5p when the first UK lockdown was announced. However, anyone brave enough to buy this penny stock back when the chips were down will have done extremely well. Since March 2020, the valuation has climbed roughly 560%!

Based on today’s half-year numbers, I think there could be even more upside ahead.

Sales soar at this penny stock

At £12.2m, revenue rocketed no less than 184% in the six months to the end of September. To put this in perspective, that’s more than in the whole of the previous financial year. Gross profit came in at £6.9m — up more than 200% — and gross margin hit a superb 56.5%.

Other positives include the number of active customers over the six months soaring by 41% to over 191,000. This suggests that co-CEOs Ali Hall and Julie Lavington have got their marketing strategy spot on. 

Like many penny stocks, Sosander remains loss-making. However, an EBITDA (earnings before interest, tax, depreciation, and amortisation) loss of just under £1m is lower than the £1.02m seen last year. In other words, things are going in the right direction. In fact, the Wilmslow-based business revealed that it was EBITDA positive in both October and November as shoppers snapped up partywear, outerwear, and knitwear. 

No sure thing

Perhaps unsurprisingly, Sosander stated that it was trading ahead of current analyst expectations for the full year. Unfortunately, the share price is barely up as I type. I think this is most likely due to traders being caught off guard by suggestions that existing vaccines may not be all that effective against the new Covid-19 variant. On another day, the reaction might have been a lot different.

Even so, it’s worth bearing in mind that Sosander is hardly a risk-free proposition. Although the company had seen “no material impact” from supply chain disruption so far, things could easily get worse before they get better. I’m also minded to remember that, pandemic or not, the £75m cap operates in a highly competitive industry where, I imagine, brand loyalty is increasingly hard to secure.

My verdict

No one can say for sure what will happen next with Covid-19. As promising penny stocks go, however, this is definitely one I’ll be adding to my watchlist. If general market sentiment dips again over December, I may just need to make room for Sosander in my portfolio.