Penny stocks usually see higher volatility than large-cap alternatives. Sometimes, this high volatility is characterised by sharp falls in share prices. Yet as these are small companies with low market caps, a change in sentiment can cause a swift rally with even some relatively small buying interest. Here’s one that I think looks cheap and could come back in favour soon.
Drilling for details
I’m referring to Mincon Group (LSE:MCON). Mincon is a global engineering business specialising in the design and manufacture of rock drilling tools. Over the past year, the stock has fallen by 54%, pushing it down to 39p.
The main reason for this decline has been disappointing financials. The H1 2024 report showed revenue of €68m, down from the €80.6m from the same period last year. Naturally, this fed through to a lower profit (EBITDA) figure of €4.7m for the period. By comparison, this was at €11.8m in H1 2023.
This was put down to several factors. In different updates, the management team has spoken about higher competition, a higher cost base due to inflation, projects being put on hold due to high interest rates and more.
The latest report also spoke of “reductions in construction-related activities in North America.” Ultimately, less activity means less demand for Mincon products.
The valuation
One point that really stood out to me in terms of valuation is the price-to-earnings (P/E) ratio. It currently stands at 0.13. The share price of 39p, divided by the latest earnings per share (300p), equates to 0.13. Given that I usually say a fair value is 10 (that is, the share price is 10 times that of the latest earnings), a value of 0.13 is quite mind-boggling.
There are two ways that I can interpret a number this low. One is that the stock is genuinely very undervalued and due to it being a small company, this dislocation hasn’t been spotted by many investors.
The other interpretation is that investors simply don’t want to own the stock, as they’re concerned about the future prospects. After all, the earnings per share figure that’s used in the calculation is the one from the latest financial report. Yet if the business falls to a loss in the coming period, the EPS figure will have to be updated.
Demand is recovering
The reason why I don’t think investors are too worried about losses is that in the latest update, the firm spoke about how a recovery is expected H2, “with increasing order books and large project orders received.”
Mincon made a H1 profit even with low demand, so with higher H2 orders it makes sense that it’ll post a full-year profit. On this basis, I think the stock does look cheap.
A risk is that the share price takes a long time to recover. Some shares can stay undervalued for years. Another concern is that the market in North America could be sluggish for some time. Yet with inflation moving lower and interest rates starting to be cut, I think the drivers behind the share price fall should ease off.
I’m seriously considering adding the stock to my portfolio in the near future.
