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Despite a share price drop, this penny stock’s potential is too good to miss out on!

Smaller penny stocks often have more risk and volatility than larger stocks. Card Factory (LSE:CARD) has seen its share price drop in recent months. I still think it has excellent recovery potential and would buy shares for my portfolio. Here’s why.

Pandemic woes

Traditional bricks-and-mortar retailers have suffered at the hands of online disruptors. Card Factory is a specialist retailer of greeting and gift cards as well as party products throughout the UK. It has grown to over 1,000 stores in the UK and Ireland.

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Penny stocks are those that trade for under £1. As I write, Card Factory shares are trading for 49p per share. Back in May, its shares were trading for close to 97p per share. In five months the share price has dropped close to 50%. At this time last year, shares were trading for 34p per share so shares are up over a 12-month period.

Investor sentiment dampened on Card Factory due to the terms of a refinancing deal worth £225m, which it needed to keep the lights on during the pandemic. In order to keep up with the repayment plan, it needed to raise an additional £70m by issuing new shares. When new shares are raised, it dilutes existing shares, which can often put investors off and cause a share price crash.

Why I like Card Factory as a penny stock

I believe some penny stocks have excellent qualities and recovery potential. Here’s why I think Card Factory is one such stock:

  1. Many firms bolstered their online presence due to pandemic restrictions. Card Factory has reaped the rewards, in my opinion. In its FY results, for the year ending 31 January 2021, online sales increased by over 130%! I believe this reinvigorated channel could continue to thrive and battle against online competitors such as MoonPig.
  2. Recent updates show trading and financials returning close to pre-pandemic levels. This is partly due to pent up demand as well as economic reopening. In a trading update at the end of May, it said, “store like-for-like sales for the first 5 weeks marginally down compared to the same period in 2019”. In its most recent trading update for the six months to the end of July, trading and results continued on an upward trajectory.
  3. A new strategy revealed in 2020 by Card Factory shows me it is working hard to right the wrongs of the past. Furthermore, it is also looking to address losing market share to competitors, by becoming a “multi-channel” retailer. 

Penny stocks carry risks

I must note there are some tangible risks to investing in Card Factory. Firstly, any firm that borrows to keep the lights on is under constant threat of financial issues. Card Factory’s debt refinancing package may have offered breathing space but trading must be positive to pay down debt and keep investors happy. Next, the Covid-19 pandemic severely affected operations and finances. Further restrictions could hamper Card Factory once more. If restrictions came in during the holiday season, one of the card and party sector’s best trading periods, it would be a bitter pill to swallow.

I would happily add some Card Factory shares to my portfolio at current levels. I believe the share price will increase over time. However, I understand the volatility that comes with penny stocks, which is why I have diversified my portfolio.

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Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Card Factory. 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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