I’ve been looking at a penny stock that crashed last week to see if it’s now a bargain. The company is DX Group (LSE: DX), and the share price closed last week at 22.5p. However at one point, it was as low as 17.25p, and across the full week the shares crashed over 27%.
Before I buy, I need to understand what happened to make the share price fall so drastically. Let’s take a closer look to see if it’s now a buy for my portfolio.
A crashing penny stock
DX Group is a parcel distribution and logistics company. I previously wrote about Clipper Logistics and Segro that operate in this sector. I view it favourably due to the growth in e-commerce. DX Group specialises in deliveries with irregular dimensions and weight to both residential and business addresses.
It was an unscheduled update on Thursday that caused the share price to crash. The company admitted it wasn’t able to publish its annual report due to an ongoing corporate governance inquiry. The internal investigation is also not expected to be completed before 2 January. This is significant because it would mark six months since the end of the fiscal year end on 3 July. Under AIM rules, if a company doesn’t publish its annual report within six months of its year end, its shares are suspended from trading.
This was a worrying update for two reasons. First, current shareholders wouldn’t be able to sell their shares if they got suspended. And second, there was no detail given on the investigation itself. No wonder the share price crashed 42.5% at one point.
I’d need to understand the bull case very well if I was going to buy this penny stock.
The bull case
As already mentioned, I do like this sector. The growth in e-commerce is really accelerating now, and I don’t think this will slow for some time. DX Group is in a prime position to be able to capitalise on this trend.
The business itself has also been improving recently. Revenue grew a respectable 16% in fiscal year 2021. The company also generated a net profit of £15.4m, which was a big improvement on the net loss of £1.8m in 2020.
There has been a turnaround situation developing at the company since 2017. A new management team took over DX Group, including a CEO, chairman, and then a new CFO joined in 2018. The CEO and chairman in particular have significant experience of leading turnarounds of companies in the logistics sector. Revenue has grown every year since 2017, and the net loss has steadily decreased too.
The current management team also own a fair number of shares themselves, with the CEO in particular owning almost 11% of the company.
Is it a buy?
I’m torn here. Usually after an update like that given on Thursday, I would steer well clear of the shares. There are just too many unknowns. But since the update, the CEO, managing director and chairman all bought more shares. This says to me that the management team has little concern over the ongoing internal investigation.
On balance, I think I’m going to sit this one out for now. There’s still a question mark over what the exact issue is, and I think there are other shares to consider for my portfolio.
