It has been a wild ride lately for penny share Woodbois (LSE: WBI). The share price more than doubled in under one month (across part of April and the start of May). Over the past year, the shares have lost 10% of their value.
I think the sudden surge in the Woodbois share price – which then fell again – offers some useful lessons for investors like me. I have never considered buying its shares for my portfolio, but I think the lessons can help me more broadly.
1. Market capitalisation and price stability
With a market capitalisation of around £108m, Woodbois is not a minnow. But it is not a big company either.
As a private investor, I pay attention to market capitalisation and often choose not to invest in companies with what I see as a very small market-cap. As the Woodbois share price movement demonstrates, if a market has a relatively small capitalisation, its shares can see dramatic price movements. There simply may not be enough shares in circulation to respond to sudden surges in demand.
By contrast, a company with a large market-cap typically has enough shares in circulation to soak up short-term demand swings without a wild price change. Such price swings could work against me as an investor. That is one reason I prefer to invest in companies with sizeable market-caps.
2. Always consider director dealing
Part of the requirements of listing a company on the stock exchange are reporting director sales and purchases in its shares.
Looking at Woodbois, I notice that directors have not been buying shares lately. What is the significance of that? There are lots of reasons they may buy or sell shares in their company – to meet a personal financial obligation, or diversify their holdings, for example. But, in general, directors’ expertise and understanding of a business means that heavy buying is a sign of confidence in the business they run.
I never buy or sell shares just because directors have done so. But if a share looks like great value yet no directors have lately bought shares with their own money, I pause to consider why.
3. The Woodbois share price and my circle of competence
Finally, Woodbois, which is involved in timber trading in Africa, recorded modest revenues last year, at $17m.
I always try to invest in companies I understand and are within my circle of competence. Timber trading in Africa sounds like rather an exotic business and not one I understand. Nor is it one I can easily gather my own information on first hand, unlike say Next or Centrica where I can see at least some of the company’s operations in action in my daily life.
Exotic-sounding businesses trading as penny shares have a history of sometimes parting shareholders from their cash partly because many investors do not understand their business at all. The Woodbois share price has lost almost 90% of its value since its 2011 high.
What happens next is anyone’s guess but, as I do not properly understand the African timber trading business, I will not be investing in it.
This post was originally published on Motley Fool
