The world of penny stocks is fraught with risk. But for the investors who know how to spot winners early, it’s the perfect hunting ground for massive long-term winners. After all, many of the biggest businesses in the world today started out as tiny penny shares.
Right now, the London Stock Exchange is home to a wide range of tiny enterprises. But one that’s caught my attention this week is IG Design Group (LSE:IGR).
At a market-cap of £86m and a share price of around 88p, the celebration and gift packaging enterprise sits firmly within penny stock territory. But if analyst projections are right, that may soon no longer be the case.
What happened to IG Design Group?
IG Design Group wasn’t always a penny stock. A quick glance at its historical share price chart shows that its shares used to trade near the 600p mark, even reaching as high as 800p in early 2020. So what happened?
There were a lot of factors at play. However, in short, the problem boiled down to weak consumer spending, particularly in America. Being a seller of celebration-related products, the business is highly cyclical and linked to discretionary consumer spending. But, following the emergence of inflation, consumer wallets started to get a little tighter, resulting in lower demand for IG Design’s product portfolio.
What followed was a series of profit warnings that spooked investors, causing the company to tumble into penny stock territory. And the threat of US tariffs driving up input costs only added more fuel to the fire.
But if that’s the case, why are institutional analysts now bullish? After all, Research Tree’s placed a 198p share price target on the business. Meanwhile, Panmure Liberum’s even more bullish, projecting the stock could reach 295p within the next 12 months – a 235% potential gain!
A potential comeback story
With underwhelming performance materialising in recent years, management’s attempting to get the business back on track. And as part of that plan, IG Design’s undergoing quite a bit of a restructure.
The company has closed underperforming sites and shifted its product portfolio to focus on fewer, higher-margin products. At the same time, new senior leadership has been brought in across its finance and logistics departments.
This turnaround strategy obviously comes with execution risk. Don’t forget that restructurings can cause a lot of short-term chaos, even when the right decisions are made. But in the medium term, management believes it can get profit margins back on track at 4.5% or more compared to the current 1.8%.
At the same time, free cash flow is expected to meaningfully return to the black while also making operations leaner and more agile. And if the firm can hit these goals, then the optimistic outlook from Panmure Liberum makes a lot of sense.
With that in mind, value investors who don’t mind a bit of volatility may want to consider taking a closer look at this unloved enterprise.
