Should I buy this travel penny stock for growth and returns?

Jabran Khan delves deeper into this FTSE penny stock operating in the travel sector to see if it could offer long-term growth and returns.

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Travel stocks have experienced mixed fortunes since the pandemic struck. Many dropped to levels never seen before, recovered temporarily, but then further restrictions pulled them back once more. With restrictions seemingly a thing of the past, could penny stock Hostelworld (LSE:HSW) be a good stock to buy for my holdings with the hope of growth and returns? Let’s take a look.

Booking a hostel worldwide

Hostelworld is an online booking platform that allows travel goers to book budget hostels throughout the world. It hosts the software and maintains a database of hostels throughout the world appealing to budget accommodation enthusiasts primarily.

It is worth remembering that a penny stock is one that trades for less than £1. As I write, Hostelworld shares are trading for 84p, which is similar to levels seen at this time last year, when they were trading for 83p. More recently, however, a stock market dip in March saw the shares fall to 61p. This means the shares have returned 37% in a five month period.

A penny stock with risks

When looking at the bearish aspects of Hostelworld shares, I noticed a few stand-out issues. Firstly, current macroeconomic headwinds could impact performance and returns, at least in the short term. Soaring inflation has led to a cost-of-living crisis. This means that booking holidays, even budget holidays, could be tough for consumers.

Next, I always refer to a firm’s past performance to help build my investment case. In the case of Hostelworld, it has a chequered track record. This includes loss-making periods and a lack of consistent returns. I am aware that past performance is not a guarantee or a sign of future performance, however.

The bull case and my verdict

So to the positives then. Firstly, pent-up demand has benefited many travel stocks, including Hostelworld. I believe consumers, including myself as an avid traveller, have a newfound appreciation for travelling due to the restrictions that forced many to go without a holiday for at least a couple of years.

Next, earlier this month Hostelworld released an interim trading update for the six months ending 30 June 2022. The main takeaways were largely positive, which helped build my investment case. It said that revenue in this period surpassed the 2019 half-year period by 866%, which is pleasing to see. Pent-up demand is playing a part, it said. Net bookings were up too. The trading update showed signs of recovery to me as a potential investor.

Considering the positives and negatives, I would be willing to open a small position in Hostelworld shares. I like a penny stock for my holdings and own many others. Part of my investment strategy is to look for small-caps that could eventually grow to provide lucrative returns. I believe Hostelworld could fit the bill here, hence my decision.

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. The Motley Fool UK 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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