It’s true that penny stocks are usually more volatile than multi-billion market cap firms. However, when I spotted that the Watkin Jones (LSE:WJG) share price fell by 32% on Wednesday (21 August), it still surprised me. The company has a market cap of £84m and a share price of 32.5p, so it technically is a penny stock. Here’s what happened.
Spooked shareholders
Before we get to the main driver behind the move, let’s quickly discuss the company. Watkin Jones is one of the UK’s leading residences for rent developers. The main focus is on the student accommodation and other affordable housing sectors.
Given that revenue for 2023 was £413.2m, it’s clear that this is a decent-sized company with weight behind it. Yet the sharp fall in the share price yesterday will likely leave some investors reeling for some time.
In a trading update, it commented that “market activity through the summer has been slower than
anticipated”. As a result, it doesn’t expect any large transactions to happen over the summer period. This means the firm has revised down expectations for operating profit. One broker that covers the stock, Progressive Equity Research, has revised down expected adjusted profit before tax from £11.5m to £7m for the year.
When we consider the extent of the hit this could mean for profits, the 32% drop does appear to make sense.
Weighing up both sides
Looking forward, I think things are finely balanced. On the one hand, the business flagged up that the lack of transactions this year will impact results in 2025. After all, lower sales now mean that those sites “will not contribute to revenue in future periods until they are forward sold”.
Therefore, the firm doesn’t expect operating profit for 2025 to be above the 2024 figure. This isn’t a great statement for investors who are considering buying the stock.
There are some reasons for optimism though. Interest rate cuts should make it easier and more financially profitable for the business to operate, given that the cost of funding and taking on new debt will be cheaper.
Further, there’s a continued shortage of rental and student properties, meaning there will be demand going forward. It’s not like the business is focusing on an area in the property market that’s really saturated.
Better options elsewhere
Based on the fact that the stock is down almost 5% today, it doesn’t look like the dip has been bought by value investors. It makes me cautious about buying, especially as the volatility with penny stocks can be high.
With my free cash, I feel there are plenty of better ideas out there right now. I don’t feel confident enough in the case for the Watkin Jones share price to recover quickly. On that basis, I’m staying away.
This post was originally published on Motley Fool
