[date-today format='F j, Y']

This former penny stock has gained 1,000% in 5 years. Am I too late to buy?

Roland Head revisits a former penny stock he sold too soon. This company has delivered a total return of over 1,000% in five years. Is...
Photo by Batyrkhan Shalgimbekov

Recent stock market falls are understandably worrying for many investors. But I reckon it’s a mistake to focus too much on the short term. The former penny stock I’m looking at today has risen by more than 1,000% over the last five years. The recent market wobble hasn’t made much difference to that gain.

Since February 2017, this investment has turned £1,000 into more than £11,000, including dividends. That’s a potentially life-changing profit. Some investors think this share still looks cheap. I’ve owned this stock before but sold my shares too soon. Should I buy back in today?

Winning with oil and gas

The company in question is North Sea oil and gas producer Serica Energy (LSE: SQZ). Chief executive Mitch Flegg oversaw a transformational deal with BP in 2018, when the company bought the Bruce, Keith and Rhum (BKR) fields in the North Sea.

This acquisition made Serica a substantial North Sea producer. Over the last year, the group has been perfectly positioned to benefit from surging oil and gas prices. More than 85% of Serica’s production is gas, and the company supplies around 5% of total UK gas production.

Broker forecasts suggest that Serica will report a profit of around £200m for 2021, compared to £64m in 2019 and just £8m in 2020.

I’ve been a fan of Serica for a while. In my view, this is a well-run business with strong finances. I certainly regret selling my shares in October last year — the stock has risen by another 20% since then.

Is this former penny stock still cheap?

I think Serica shares could still be cheap. But there are a couple of things about the company’s valuation that make me cautious.

First of all, the shares are currently trading on a price/earnings (P/E) ratio of just three times 2022 forecast earnings. That’s unusually low, even for a fossil fuel stock. BP, for example, has a forecast P/E of seven.

My second concern is that Serica’s dividend is unusually mean. The group’s net cash balance was £218m at the end of 2021. Earnings of 82p per share are expected for the year — a record high. Despite this, broker forecasts suggest the 2021 dividend will be just 3.5p per share, giving a measly 1.6% dividend yield.

These numbers suggest to me that the market doesn’t believe Serica’s profits are sustainable. I share this view. At some point, I think that lower oil and gas prices plus rising decommissioning costs will cause Serica’s profits to plummet.

I also get the feeling that Mr Flegg is holding on to the company’s cash because he expects to need it in the future. My guess is that Serica’s big cash pile is being earmarked for decommissioning costs and — perhaps — for acquisitions to replace the BKR fields, when they start to decline.

Serica share price: my decision

I think Serica is a good business and I admire what chairman Tony Craven-Walker and CEO Mitch Flegg have achieved. It’s possible that the two men will continue to expand this business, rewarding shareholders.

However, I just don’t think the shares are as cheap as they might seem.

In my experience, buying commodity producers when commodity prices are high is often a bad idea. Although I think Serica’s profits may rise this year, I suspect they will fall from 2023 onwards. On balance, I think it’s probably too late for me to buy.

The post This former penny stock has gained 1,000% in 5 years. Am I too late to buy? appeared first on The Motley Fool UK.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you’ll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

Since 2016, annual revenues increased 31%
In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

More reading

Share prices are tanking. Please read this
Buy the dip! 3 penny stocks I’d buy after recent market volatility
2 of the best FTSE 100 shares to buy right now
2 UK dividend stocks I’d invest a spare £250 in today
The best dividend shares to buy right now

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.





© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Latest News