Is this falling penny stock an opportunity or one to avoid like the plague?

This penny stock has been on a downward trajectory for some time now. Could it be a bargain buy with a view to a turnaround in the long term?

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Superdry (LSE: SDRY) currently trades as a penny stock. I want to take a closer look to see if there is an opportunity to pick up cheap shares for my portfolio.

A fallen brand

I would argue that Superdry is a fallen brand. Once a popular fashion staple known for its unique blend of colours and edgy Japanese fonts and logos, its popularity has waned in recent years. It was so on-trend some years ago it was endorsed by stars including David Beckham. Now, it’s more associated with middle-aged men perhaps trying to stay connected to their youth, in my opinion.

Let’s take a look at Superdry’s share price first before we explore what went wrong. As I write, they’re trading for 76p. A penny stock is one that trades for less than £1. At this time last year, they were trading for 126p, which equates to a 39% drop over a 12-month period. Over a five-year period, the shares have dropped by 95% from 1,295p to current levels.

A simple way of looking at Superdry’s demise is to say the brand went out of fashion, coupled with the rise of fast fashion and more savvy competitors who were able to cater to the changing needs of its customers as well as changing trends.

To buy or not to buy?

Let’s start with the bull case. Firstly, Superdry shares are dirt cheap at present. They trade on a price-to-earnings ratio of just seven. I think there is little risk involved if I were to buy a small number of shares.

Next, Superdry has had liquidity issues in the past. However, recently, I can see it has raised nearly £12m through a new equity issue. This should be able to support growth initiatives as well as shore up its balance sheet.

In addition to this, Superdry CEO Julian Dunkerton recently purchased a million shares. When insiders, especially at senior level, are spending their own cash on shares, this could be a positive sign. After all, who better to attest to the potential success and direction of a business than those running it.

To the bear case then. Superdry has an image problem, in my opinion. Although once a staple of young trendy fashionistas, it has attempted to adapt and move with the times but I’m not sure it can change up its whole approach and product line to become a staple once more.

In addition to this, Superdry now operates in a very competitive market dominated by online fast fashion companies including boohoo and ASOS. The face of retail and fashion has changed massively in the last few years and I fear Superdry has been left behind and may not be able to recover to former glories.

Finally, Superdry’s performance in recent years has been quite poor. Coming up to date, it is forecast to record a loss for the current fiscal year.

A penny stock for my watch list

Reviewing the positives and negatives for Superdry, the cons far outweigh the pros for me.

Overall, I’ve decided not to risk any of my hard-earned cash on Superdry. I believe there are better opportunities out there. However, I will still keep Superdry shares on my watch list and keep an eye on developments moving forward.

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.

Sumayya Mansoor 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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