Which Should I Buy? This Penny Stock or a Bottle of Beer
Trading penny stocks is one of the many ways to becoming a millionaire investor in the stock market.
Don’t get excited yet! the bitter truth is that these type of stocks aren’t just cheap in kobo for no reason, most of them are beaten-down stocks that are out of favour and less attractive which could lead to multi-month sell-off that follows revenue losses, declining profit, cash flow, unfavourable government policies, bad management, rising debt burden, and so on. In summary, they are a no-go area for beginners. So you’d be better off drinking beer with your friends in one of the Premier or Champion League fixtures.
For smarter investors, these aren’t dead-end for companies but provide an opportunity to dig deeper into a few turnarounds picks that will survive the downturn, come out bigger and generate 2x or even 5x returns.
2020 isn’t one most consumer goods stock will forget in a hurry and one of the few penny stock suffered but seems to have in it an undiscovered opportunity to make money from capital appreciation is Champion Breweries.
This stock had been pressured by heavy sell-off in the last 8 years – from a historical high of N19.48 reached in 2013 down to 69kobo in March 2020, no thanks to the Covid-19 pandemic that shut its supply channels and distribution networks, but had since staged an impressive recovery to N4.13, which is 573% appreciation.
While I am not expecting the company to go back to its all-time, I think it’s attracting buyers interest lately.
Champion Breweries sell consumer discretionary products; items you can only buy after meeting your basic necessities, so it should come as no surprise that its business operation has been ‘disrupted by the total lockdown imposed by the Federal government in 2020.
This rubbed off on its financial result with revenue growing by just 1% and profit trending southward.
Champion Breweries Plc released its audited results for the year ended 31st December 2020.
- Revenue for the year was N7.05 billion. (+1.80% YoY)
- Operating expenses during the year was N1.58 billion. (-9.56% YoY)
- Profit for the year summed N158.79 million. (-5.77% YoY)
- Earnings per share at the end of the year was 2kobo.
- The Board of Directors made no dividend recommendation. (source)
Here is the opportunity…
Even though some businesses have declared bankruptcy, I think the non-recurrent nature of the pandemic, at least, not like before, will make Champion Breweries one of the hottest penny stocks that will definitely benefit from the recovery. As hotels, restaurants, bars, nightlife, and event businesses open their door to customers, I think it’s smart to play this consumer discretionary stock after an impressive first quarter result.
In its latest Q1, 2021 result, the company reported a double-digit revenue growth of 26.98% buoyed by increased sales of its products during the quarter. Its profits after-tax, in spite of the high direct cost, compared to the previous year’s figure of N48.33, went up by 38% to N7.66 billion (compared to N5.53 billion generated in the previous comparable quarter).
EPS ballooned by 43% to 96kobo from 69kobo.
Another sign of a turnaround is the 40.7% increase in its operating profit to N14.5 billion in Q1 2021 from N10.94 billion in Q1 2020
Despite the sharp increase in operating expenses which is tied to rising material input, running cost and increased VAT, the company recorded an impressive result. And I think the full re-opening of bars and resumptions of distribution partners will continue to drive positive sentiments around the company’s stock going forward.
I know that sales and profit can be manipulated in accounting to make a company’s book look attractive, so switched my searchlight to cash flow from operation. Champion Breweries generated N22.2 billion from operating activities at the end of Q1 2021 which is not only positive but surpassed N4.43 billion in the previous year. This means the company had more cash to cover short term obligations.
A company that has more cash in hand will most likely issue zero corporate bond or commercial paper. and you know it’s a good sign. LOL!
Technical and Sentiments Analysis
Champion Breweries stock is up by a whopping 120% in the last 6 months, dwarfing the NSE ASI negative performance of 3% in the same period. After reaching an all-time high of N4.13, its share price has pulled back significantly to N1.8, an area my preferred multiple technical indicators reveals as oversold.
With the share recovering from an oversold region, up by 10% in the current week and a 20-day moving average still above 50-day, I have no doubt that the consumer stock’s bull run is not over yet. An entry between N1.6 – N1.88 is a good buy and if the price dips below N1.57, you may consider an exit but for now, Champion Breweries is a great penny stock to buy right now.
Disclaimer: The opinion shared here is based on my personal research on this stock, please do your due diligence. I own Champion Breweries stock.