Could this beaten-down penny stock bounce back?

Jabran Khan details a penny stock that has suffered since the pandemic and wonders if it could be a long-term recovery play.

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Penny stocks often experience periods of downturn and volatility. The pandemic has not helped penny stock Hostelworld (HSW), but could it recover over the longer term? Let’s take a look to see if I should buy shares for my portfolio.

Travel stocks suffer

Founded in 1999 by a hostel owner and an IT executive, Hostelworld provides an online affordable distribution channel and property management system for hostels. People can book a hostel in over 179 countries using the platform.

When the pandemic struck, travel and travel-related stocks suffered massively. There was some respite in the summer when the vaccine rollout and easing of restrictions allowed travel and holidays to be booked once more. Since then, the threat of new variants and vaccine issues have caused further woes. Some stocks have not recovered at all and are experiencing a pandemic-related hangover.

As I write, Hostelworld shares are trading for 70p whereas a year ago shares were 14% higher at 82p. In the summer, shares surpassed the penny stock threshold of £1 to trade for 114p. Since that high, shares have been on a downward trajectory. 

For and against investing

FOR: Any bullish stance I have towards Hostelworld stems from pent up demand first and foremost. As an avid traveller myself, I am looking forward to being able to book holidays and travel once more. I am confident many others feel the same. If this does happen, Hostelworld could see performance bounce back from its recent woes and reported losses.

AGAINST: New variants of Covid-19, such as Omicron, travel restrictions, and constantly changing travel rules could hinder any recovery and growth. There is the notion that travel and the market as a whole may not return to normal ever again and that this is the new normal, with peaks and troughs of travel and booking of holidays. As a potential investor, uncertainty is a red flag for me.

FOR: Hostelworld’s half-year report released in August, signified to me that it is in a decent position to keep the lights on for the foreseeable future. A cash position of €33.7m and administrative expenses for the period were €13.5m. This tells me there is enough in the kitty to weather current stormy waters. In addition to this, Hostelworld does not have many assets it needs to continue to pay for and maintain. With few assets, profit margins will be high if revenue does begin to come in once more.

AGAINST: Despite what looks like a decent balance sheet, sustained losses and a lack of consistent performance across the past couple of years puts me off. Any firm that is loss-making does raise a red flag for me. This is the case with Hostelworld.

Penny stock to avoid

Overall I am sitting on the fence with Hostelworld shares for my portfolio. I can see long-term recovery potential with pent up demand to play a part and a decent balance sheet to help, but the current issues it faces are too big to ignore.

If I had to make a decision right now? I would avoid buying shares for my portfolio. If the travel and tourism sector picked up based on Covid-19 issues easing, I would revisit investing if shares were trading at similar levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jabran Khan 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.

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