This penny stock crashed by 15% yesterday! Is this the best time to buy it?

This penny stock plunged yesterday after a profit warning in its latest trading update. But could the market have overreacted to it?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stacks of coins

Image source: Getty Images

Investors are beginning to take talk of inflation very seriously now, it seems. Just yesterday, the greetings card retailer and penny stock Card Factory (LSE: CARD) saw a 15%+ drop in price after its trading update. From what I could see, the update had a number of positives. However, it did raise one issue: inflation, and particularly how this could impact its margins. 

Profit warning drags down the share price

A predicted hit to profits is always an indicator that the price could fall. And when it is coupled with all the ways in which price rises can impact business, I think the potential problem appears bigger. The company talked about increasing freight cost, the impact of inflation on costs of staff and utilities, as well as bigger investments as the reasons why profits could fall. To counter this, it plans to increase prices and focus on business efficiencies, which could reduce some of the impact of inflation, but not entirely. 

The headline inflation numbers have been starting to look like a bigger issue of late before this update. The UK’s inflation rate came in at 5% on a year-on-year basis for November 2021. The next number due soon is slated to be even higher. A number of companies have talked about inflation in their trading updates. But none I have come across have talked either in as much detail or have expected such a significant reduction in profits because of it. 

Has the market overreacted?

While I do not want to take away from how seriously Card Factory will be affected, I believe that there might have been a bit of a market overreaction to the update. There were some positives to it too. Sales for the 11 months ending 31 December 2021 were ahead of its expectations. While they were still lagging behind pre-Covid 19 numbers because of store closures earlier in the year, its retail footfall numbers were also ahead of that for the country as a whole. And its online revenues have improved as well. 

What’s next for the penny stock?

This suggest to me that all if far from lost for the stock. In 2022, I think it is fair to expect the Covid-19 situation to come even more under control. Also, with the economic recovery under way, demand for non-essential consumer products could continue to improve. The Card Factory share price is still way below its pre-pandemic levels. In fact, at the start of the pandemic it dropped to penny stock level. Even though it has made significant gains since the worst of the pandemic, it is still priced at sub-£1. 

Of course because of an increase risk of inflation, I think a full recovery in its financials could be delayed. But I think it is only a matter of time before it does happen. I would still buy Card Factory stock.

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 considered so you should consider taking independent financial advice.

Manika Premsingh has no position in any of the 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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

When will the Rolls-Royce share price recover?

The Rolls-Royce share price may be down, but cash flows are surging! Zaven Boyrazian explores how long it could be…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

1 dirt-cheap FTSE 100 stock I think could TRIPLE my money!

Demand for lithium is forecast to surge by 42 times, enabling this FTSE 100 stock to potentially supercharge its profits…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

2 top FTSE 100 shares I’d buy before the market rebounds!

Christopher Ruane identifies a pair of FTSE 100 shares that have both tumbled in the past year and that he…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Here’s why the next bull market may have already begun

The UK stock market has taken the Bank of England's interest rate hike in its stride and green shoots suggest…

Read more »

Gold medal
Investing Articles

No contest! Here’s my stock of the week

An update from this company offered some relief from the economic gloom. It's this Fool's stock of the week.

Read more »

Cogs turning against each other
Investing Articles

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Scottish Mortgage shares have risen over 25% in the past 30 days. This Fool takes a look at why and…

Read more »