Are Woodbois shares worth me buying at 4.7p?

Jon Smith considers the recent surge in price for Woodbois shares, and wonders if the move lower last week represents a buying opportunity.

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The Woodbois (LSE:WBI) share price has been on a rollercoaster ride recently. A month ago, Woodbois shares were trading at 4.45p. The price hit 8p on the first Wednesday in May, before closing last week at 4.7p. It’s down over 21% in 12 months and with most of the recent surge now gone, should I buy the shares for a second potential jump?

Reasons for the surge

It’s important to understand why Woodbois shares jumped so much in a short space of time. To begin with, the company is a penny stock with a low market capitalisation. According to my calculation, the market cap at the moment is £90m. When the market cap is low, erratic price movements can be triggered easily. If I bought £1m worth of the stock, it would cause a far greater move higher than if I bought the same amount of shares in a large-cap stock from the FTSE 100.

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Therefore, when this move started to take off, the frenzied buying activity from retail investors and others quickly pushed the price even higher, given the size of the market cap at the time.

Another more fundamental reason for the jump is the impressive Q1 results that were put out a month ago. Revenue jumped 22% versus the same quarter last year, with it also being the best quarter for volume of product shipped since before the pandemic.

The outlook for the rest of the year likely helped Woodbois shares move higher. The update noted that “we expect the business to increase both scale and profitability during 2022 as new production capacity comes on-line and assuming shipping returns to more normal patterns.”

Finally, a paid ad that appeared high on the online search results claimed that a 1,000% share price increase was due. Unfortunately, this lacked any real analysis, yet could have helped drive the price higher speculatively.

Should I buy Woodbois shares now?

The fact that the surge has now almost completely re-traced makes me very sceptical about investing. To me, it’s a classic sign of a speculative move, driven without any real substance.

Sure, the Q1 results were positive, and merited a move higher. Yet to almost double in price in a few weeks feels very unnatural to me. I think many investors bought Woodbois shares to make a quick buck and have now sold out. This isn’t The Motley Fool approach to investing.

Granted, the price-to-earnings ratio sits at just 1.62. This is a very cheap level and could suggest that the stock is undervalued. Yet this is based on the profit from 2021. In the three prior years, the business was loss-making.

Finally, I’m in no way an expert in the sector that Woodbois trades in. It’s an African-focused forestry company. It produces and trades hardwood products globally. I’d really need to do a lot more research before I’d feel comfortable buying. On that basis, I won’t be investing, even at current share price levels.

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Jon Smith and The Motley Fool UK have 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.

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.

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