3 reasons this penny stock can rally now. But would I buy?

This penny stock’s price reached multi-year highs last year only to crash. Here are four reasons it can be back in 2021 – but is that reason to buy?

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Equipment rental company HSS Hire (LSE: HSS) had a disappointing start to 2021. After reaching multi-year highs in mid-2020, this penny stock had crashed to sub-10p levels by year end. 

But I think things may be starting to change, which probably explains why HSS Hire’s share price has started inching up.

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Here are three positives I see:

#1. Construction is resilient

The construction industry is in a resilient place. Last week, the UK’s economic growth numbers for January showed that construction was the only sector to grow as the country entered the third lockdown. It grew by 0.9% from the month before, while the UK economy, in contrast, shrank by 2.9%. 

I think this bodes well for HSS Hire, which is closely linked to construction. Incidentally, the company’s share price has spiked since the number was released, which I think may not be a coincidence. 

#2. Policy push

The future looks bright too. Policy makers are clearly doing their bit. The UK budget for 2021, released earlier in the month, saw an extension of the stamp duty waiver. Easier availability of loans with 5% deposit is also a positive policy measure for real estate, which is already on fire.

According to the FTSE 100 real estate e-marketplace Rightmove, the gap between property demand and supply right now is the biggest it has been in 10 years. Considering the link between property and construction, I think there could be beneficial ripple effects on the sector, another plus for HSS Hire. 

#3. Pivoting penny stock

While last year has been pretty bad for HSS hire, I like that it has accelerated its digital strategy. Because of this, 30% of its new contracts were raised through digital channels for the half-year ending 27 June 2020. 

I think this is an important development not just because it gives a better shot at growth during the long-drawn-out pandemic but also because digital will increasingly be the way business is done in the future

The downside for HSS Hire

While these developments give HSS Hire a chance to get out of its current funk (its revenue fell for the half-year and it reported a net loss), I think it is essential to look at its performance in earlier years too. 

The company has reported a loss in four of the last five years, including the half-year numbers for last year. The fact that it had showed a small profit in 2019 makes me hopeful that it can make a comeback, but very cautiously so. 

Also, its debt is high. Its debt leverage, which is net debt divided by pre-tax earnings, is at 2.9 times, almost unmoved from 2019. HSS Hire aims to bring it down to 2.5 times.

Because of this, it has decided not to pay a dividend, which for now also makes the stock less attractive. 

The upshot

Clearly, in terms of financials, HSS Hire has much to sort out. While positives are piling up for it, I am not yet convinced of its long-term prospects.

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Manika Premsingh owns shares of Rightmove. The Motley Fool UK has recommended Rightmove. 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.

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