Up 10% in a week: one good-looking penny share I’d like to buy

Our writer explains why this beauty-focused penny share could be the next addition to his stock portfolio.

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As a Foolish investor, I must say that I love to hunt for a bargain. Penny shares have always piqued my interest given their small size and typically higher level of price volatility.

Penny stocks refer to companies with a market capitalisation below £100m and a share price of less than £1.

Worth a pretty penny

One that caught my eye this week was Revolution Beauty Group (LSE: REVB). It is a global, multi-category, mass beauty and personal care business. I like that the company is diversifying with its wholesale retailing relationships, as well as operating with a clear digital sales strategy.

Revolution Beauty shares have soared 10% in the last week alone. Shares in the AIM-listed beauty retailer are trading at 29.5p with a £93m market capitalisation. In its most recent interim results, the company reported adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £6.4m from £90.4m.

Recent update

The company recently held its Capital Markets Event on 8 February with a brief update to investors. One thing that stood out was its diversified global earnings across the USA (27% of sales), UK (34%) and Rest of the World (39%).

Revolution Beauty’s “fast to market” content model is also a tick in my books. The company has focused on delivering engaging content quickly to maintain and capture additional market share.

While there’s a lot to like about Revolution Beauty, there are always risks to investing. I think penny shares, in particular, warrant heightened due diligence given their small size and often significant price swings.

One key risk I can see is that Revolution Beauty is very consumer facing. While the company’s recent Capital Markets presentation shows a US$460bn (and growing) global beauty market, I am wary of direct-to-consumer companies. People do like to spend on cosmetics, which comprise 78% of group sales, but that can be tested when times get tough.

Businesses tend to be more resilient and more reliable from a customer perspective. Given the current economic climate, including heightened cost-of-living pressures, I could see consumers reducing their beauty spend in favour of the bare necessities.

E-commerce vs brick-and-mortar

The other thing that jumps out to me is the high percentage of earnings from physical retail stores. Revolution Beauty reports 80% of its earnings are from physical retail with 20% via digital.

With the rise of e-commerce and the likes of Amazon, brick-and-mortar retail has been under pressure in recent years. One big positive, however, is that real estate isn’t a major part of the business with property, plant and equipment making up £7.9m or 6.0% of total assets in FY23.

The strong gains in the last week or so indicate that other investors are buying up Revolution Beauty shares. I like the look of the business but am wary of the consumer-facing element if we see further recessionary conditions.

All in all, I’m willing to bide my time and consider buying when I see the company’s next results release to allay my concerns.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. 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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