If I had invested in recruitment services provider Staffline (LSE: STAF) last year, it would have been a great penny stock to buy for me. Its share price was 25p then and it is now three times that level at 75p. This is one of the biggest increases I have seen in the past year among all stocks.
While that sounds promising, it also means there should be something in its performance or outlook to merit the rise. Otherwise, it is likely the stock has increased too much and could plateau now until its performance catches up, or worse, correct from present levels. Let us find out if either of the two is the case here.
Unbelievable increase in underlying profits
A couple of weeks ago, the AIM-listed company released its results for the six months ending 30 June. They were a mixed bag. Its revenues showed a 4.7% increase from the same time last year, which is encouraging. And its underlying operating profit increased by an unbelievable 4,500%, which could explain why its share price has risen at a breakneck speed over the past year.
As much as I like this number, the fact is that Staffline actually clocked a loss. This stems mostly from the amortisation of intangible assets — value being written off for heads like trademarks, goodwill, and copyrights among others. This maybe a one-off hit to profits, but I would have liked more detail to understand what is going on. This is especially so since the company was loss-making even before the pandemic. It would be good to know if it can make profits in more than underlying terms going forward.
Further, in its outlook, Staffline also mentioned ongoing economic uncertainty as a risk. That statement carries more weight than usual at a time when the UK’s growth has stalled to 0.1% in July, despite all restrictions being lifted. Even though I think this is only a single month’s number and not reflective of the broader situation, I do not want to ignore it completely either. Particularly not when Staffline’s performance for the rest of the year could be impacted if growth does indeed slow down.
Labour shortages are another challenge for the sector. Both the pandemic and Brexit have impacted the availability of workers in segments like hospitality and logistics. With the end of the furlough scheme in September, there may be lay-offs that allow more people to enter the job market, but that remains to be seen.
Would I buy the penny stock?
On the whole, the company is positive about its prospects. In fact, it says that the first half of the year has exceeded its expectations and that the momentum should continue in the second half as well.
Based on both present trends and the outlook, I think there is a case for Staffline’s share price to rise further. I do not think that it will rise at quite the same pace as last year. However, it should continue to rise on improved prospects, despite some lack of clarity about its bottom line. It is a cautious buy for me, which is far more than I can say for some other penny stocks.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has 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.