Not all small-caps can turn into market leaders or blue-chips. Many do fail due to a lack of financial might, or are taken over by bigger firms.

However, I reckon Revolution could see itself growing, and providing me with some juicy returns. Here’s why.

Beauty is in the eye of the beholder

Revolution is a beauty and personal hygiene business that sells multiple brands. It does this direct-to-consumers, and via wholesalers too.

The shares have meandered up and down like an exciting roller coaster I used to enjoy when I was (much) younger. They’re currently trading for 24p, which is exactly the same level as at this time last year. However, the shares have surpassed the 100p mark previously, in 2022, to be specific.

Revolution has been marred by boardroom politics in recent times, which has probably held the shares back. The departures of high-level execs, and the rising stake in the fast-fashion business boohoo, has been problematic, in my eyes.

With all this going on, I’m not surprised that institutional investors want to see the lay of the land in respect of the firm’s leadership and direction. Plus, full-year results for the period ending February 2024 haven’t been released yet.

The investment case

Continuing the theme of issues and risks, boardroom instability is a worry. This can impact the direction of the business, which could hurt operations, earnings, and investor sentiment. This is something I’ll keep a close eye on.

Next, the beauty market is very competitive, and the margins aren’t always the largest, especially with current inflationary pressures too. As I referenced above, a larger player may take the business over, or just outmaneuver it totally into non-existence.

However, it’s not all doom and gloom, in my view. Forecasts indicate the firm’s first profitable year since initial public offering in 2021 is on the cards. This could be huge for the business, and shares. However, I’m conscious that forecasts don’t always come to fruition. Plus, the firm possesses a decent looking balance sheet, which is always positive for small caps.

Next, the business has managed to develop a great footprint despite the fact it hasn’t been around a long time. This includes a wide geographic footprint, as well as key wholesale relationships.

Finally, from a general perspective, the beauty market is a burgeoning one that shows no signs of slowing according to data giant Statista. This could be good news for the business and its growth aspirations.

What I’m doing now

Looking back at recent events, the general landscape of the market, as well as historic share price performance, I’m buoyed by Revolution. I reckon there’s potential for this stock to climb much higher.

I’d be willing to buy a small number of shares at just 24p per share when I can and see what happens. I’ll be marking my calendar for full-year results, and hope boardroom unrest is now a thing of the past!

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A rollercoaster of a year

The company in focus is Revolution Beauty Group (LSE:REVB). It has a market cap of £82m and a current share price of 26p. As such, it ticks the box to be classified as a penny stock.

Over the past year the share price has rallied by 6%. However, this doesn’t do justice to the wild swings in the stock.

Last year the business had to contend with the departure of several senior leaders, including the CFO Elizabeth Lake, the former chairman Tom Allsworth and co-founder Adam Minto. During this period, there was an accounting probe, as well as an agreed settlement with Minto in which he had to pay back £2.9m to the firm.

As the developments with the above went back and forth, the share price dipped and rallied. This also wasn’t helped by the major shareholder in the business, boohoo. The fast fashion giant was pushing for the removal of the key execs. It aimed to replace them with its own candidates, for example the CFO role.

Yet for now, the rollercoaster ride seems to be over. Up ahead, if we can get a more stable couple of years from senior management, it could really help the business to grow. In turn this should lift the share price.

Getting back to basics

Aside from the internal politics, the business does appear to be fundamentally sound. Although we’re still waiting for the release of the 2023 results (the financial year goes through to the end of February) the latest update was positive.

It upgraded EBITDA forecasts to £12.5m, from the previous estimate of £11m-£12m. If it does record a profit before tax, it would be a huge positive. Since the stock went public in 2021, it hasn’t turned a profit. In fact, last year it posted a loss of £33.9m. So to flip to a profit would be a huge step forward.

Even though the stock jumped on this news, I’d expect a further jump on confirmation of this when the results come out.

Balancing the risks

There’s huge potential reward here. The stock was above 100p as recently as summer 2022. But there are risks involved. The issues with the clearout of senior management may have damaged the reputation of the brand. I think larger institutional investors will want to wait and see how things go this year before deciding to commit and buy.

Another risk that we need to acknowledge is the competitive nature of the beauty sector. It’s dominated by larger players than Revolution Beauty. With thin margins and everyone trying to get more market share, it’s not an easy space to compete in.

But I think I’m going to allocate a small amount of money to the stock, given the large potential for the share price to recover.

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Here’s why!

DP Poland

The business franchises the famous Domino’s Pizza brand in emerging markets Poland and Croatia.

DP Poland shares are up 50% over a 12-month period from 8p at this time last year, to current levels of 12p.

From a bullish view, demand for fast food in Poland and Croatia is soaring. Emerging markets present an opportunity for the firm to capitalise on rising personal income levels, as well as current low market penetration.

The business has recorded excellent performance in recent times. In fact, it recorded its best ever quarter, the final quarter for 2023. Like-for-like sales in this period increased a whopping 27.5%.

For the year as a whole, the business posted an update in January. Like-for-like sales in Poland and Croatia rose by an impressive 19.4% and 16.4%.

From a bearish view, the fast food industry is intensely competitive. I’m sure others will be looking to capitalise on this potentially lucrative emerging territory. Plus, current inflationary pressures are an ongoing risk as they could take a bite out of profit margins.

Overall, the DP Poland continues to open new locations. Furthermore, it’s investing heavily in marketing and technology to zero in on a dominant market position. A healthy looking balance sheet should stand it in good stead. One of my biggest worries with small cap shares is a lack of cash, which can often lead to trouble.

Revolution Beauty Group

Personal care and beauty business Revolution Beauty Group has been on a great growth journey, and went public back in 2021. The business sells a number of brands direct to consumers via e-commerce, as well as in retail stores.

The shares are up just over 12% during a 12-month period from 24p at this time last year, to current levels of 27p.

According to data published by Statista, the beauty and personal care market is only set to continue to grow at a rapid rate. This could be good news for the business.

Revolution has a lofty aim of hitting £1bn worth of sales by 2030. A new management team, brought in due to an accounting and reporting scandal, are looking to deliver fresh impetus to the business to hit this target.

Last month’s trading update shed further light on recent trading, and full-year expectations. The business said EBITDA growth should come in at low double-digit figures, which is an upgrade on the previous forecast. It looks like the firm’s strategic review to drive efficiencies, margins, and profitability is already working.

From a bearish view, I’m going to keep an eye on beleaguered fast fashion firm boohoo‘s growing influence on the business. It currently holds close to 30% worth of shares in the business. boohoo’s well documented struggles are something I’m hoping that Revolution can avoid in the future.

Overall, a positive journey to date, fresh impetus, and strategic review looking like it’s bearing fruit. These, along with a burgeoning market place help build my investment case.

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Penny stocks refer to companies with a market capitalisation below £100m and a share price of less than £1.

Worth a pretty penny

One that caught my eye this week was Revolution Beauty Group (LSE: REVB). It is a global, multi-category, mass beauty and personal care business. I like that the company is diversifying with its wholesale retailing relationships, as well as operating with a clear digital sales strategy.

Revolution Beauty shares have soared 10% in the last week alone. Shares in the AIM-listed beauty retailer are trading at 29.5p with a £93m market capitalisation. In its most recent interim results, the company reported adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £6.4m from £90.4m.

Recent update

The company recently held its Capital Markets Event on 8 February with a brief update to investors. One thing that stood out was its diversified global earnings across the USA (27% of sales), UK (34%) and Rest of the World (39%).

Revolution Beauty’s “fast to market” content model is also a tick in my books. The company has focused on delivering engaging content quickly to maintain and capture additional market share.

While there’s a lot to like about Revolution Beauty, there are always risks to investing. I think penny shares, in particular, warrant heightened due diligence given their small size and often significant price swings.

One key risk I can see is that Revolution Beauty is very consumer facing. While the company’s recent Capital Markets presentation shows a US$460bn (and growing) global beauty market, I am wary of direct-to-consumer companies. People do like to spend on cosmetics, which comprise 78% of group sales, but that can be tested when times get tough.

Businesses tend to be more resilient and more reliable from a customer perspective. Given the current economic climate, including heightened cost-of-living pressures, I could see consumers reducing their beauty spend in favour of the bare necessities.

E-commerce vs brick-and-mortar

The other thing that jumps out to me is the high percentage of earnings from physical retail stores. Revolution Beauty reports 80% of its earnings are from physical retail with 20% via digital.

With the rise of e-commerce and the likes of Amazon, brick-and-mortar retail has been under pressure in recent years. One big positive, however, is that real estate isn’t a major part of the business with property, plant and equipment making up £7.9m or 6.0% of total assets in FY23.

The strong gains in the last week or so indicate that other investors are buying up Revolution Beauty shares. I like the look of the business but am wary of the consumer-facing element if we see further recessionary conditions.

All in all, I’m willing to bide my time and consider buying when I see the company’s next results release to allay my concerns.

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In other words, we’re not simply looking to cash out when a former penny stock hits the big time. Instead, as Fools, we’re looking for long-term investments in quality — but perhaps underappreciated — companies.

Facilities by ADF

What it does: ADF provides serviced production facilities to the film and television industry in the United Kingdom.

By Mark David Hartley. Currently trading at 56p per share with a market cap of £44.9m, I think Facilities by ADF (LSE:ADF) has strong growth potential.

Its price-to-earnings ratio (P/E ratio) is 7.5 times and earnings per share (EPS) growth rate is 32.5%. With this, I can calculate its price/earnings to growth (PEG) ratio by dividing the P/E ratio by the EPS growth rate:

7.5 / 32.5 = 0.23

In general, a good PEG ratio is considered to be anything less than 1.0. ADF’s PEG ratio of 0.23 indicates the company is significantly undervalued and likely to experience positive growth soon.

However, ADF has a high level of non-cash earnings, resulting in weak cash flow relative to earnings. This could indicate lower quality earnings which could threaten growth. Furthermore, it lacks a significant dividend track record and recently diluted shareholder earnings by issuing 6.5% more shares.

Mark David Hartley does not own shares in Facilities by ADF.

Revolution Beauty

What it does: Revolution Beauty sells make-up, skincare and hair products to major retailers, as well as selling online. 

By Jon Smith. If it’s possible to have an undervalued penny stock, I think Revolution Beauty (LSE:REVB) fits the bill. Since the IPO in 2021, the stock has been hit hard with a lengthy accounting scandal. With both the CEO and CFO now out of the business, I think the storm has passed.

With a market cap of £96m and a share price gain of 20% over the past year, I think the firm can get back to better days when the firm was larger in size. With boohoo holding a 27% stake in the firm and appointing former CFO Neil Catto to serve at Revolution as of January, I believe the business is ready to start a new chapter.

Fundamentally, the business has good clients and is present in major retail stores. It has the right platform to grow, although the hangover from the accounting problems could linger for longer than I expect.

Jon Smith does not own any of the shares mentioned.

Springfield Properties

What it does: Springfield is a Scottish housebuilder with a focus on building private and affordable housing.

By Roland Head. I’m optimistic about the outlook for Springfield Properties (LSE: SPR), especially after the firm recently reported a new £15m affordable housing contract.

The company says that reduced build cost inflation has allowed to start bidding for new projects again, after a temporary pause. Over the last eight months, £40m of new contracts have been signed.

Despite this improved outlook, Springfield’s shares are continuing to trade well below the book value of its land and property assets. These were last reported at about 125p per share, well above the current share price.

The risk is that in a housing market downturn, the value of Springfield’s assets could fall. Debt problems are another potential concern, but my feeling is that the company’s finances look safe enough for now.

If Springfield’s trading continues to recover this year, I think the shares could gradually re-rate to trade above their book value, as they have done previously.

Roland Head does not own shares in Springfield Properties.

Topps Tiles

What it does: Topps Tiles is a tile, stone, laminate and and flooring retailer, and sells related products.

By Alan Oscroft. The Topps Tiles (LSE:TPT) share price recovered quickly from the Covid pandemic. But it then got a kicking from the property market slump.

The shares have lost around a third of their value in the past five years. And that takes Topps down into penny stock territory, with a share price of under 50p and a market cap of around £92m.

I think we might see weakness ahead, with some delay between mortgage rates starting to soften and the demand for building materials picking up.

And a price-to-earnings (P/E) ratio of 13 might not look all that cheap for 2024. But forecasts show it dropping as low as 8.5 in 2025 with earnings set to rise sharply.

I treat forecasts with caution. But if it comes off, I think we could be looking at a winner here.

And while we wait, there’s a forecast dividend yield of 8%.

Alan Oscroft has no position in Topps Tiles.

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Here’s why I reckon investors should be taking a closer look at them.

Beauty and healthcare

Revolution is a beauty and personal care business with multiple brands. It sells direct to consumers via e-commerce as well as in retail outlets. The business has been on a great growth trajectory and went public back in 2021.

Over a 12-month period, the shares are up 20%, from 24p at this time last year to current levels of 29p.

Yesterday’s FY24 update caught my eye, for positive reasons. The business reaffirmed its target of reaching £1bn in sales by 2030. A big part of this is driving efficiencies and improving margin levels, especially with current inflationary pressures.

In its half-year update in November, it said it expected to reach single-digit EBITDA and revenue growth for the full year. It has now increased its EBITDA aim to low double-digit figures, which is promising and shows signs the strategy is already bearing fruit.

Revolution has had issues with accounting and reporting trading late in the past. This resulted in a shift in management with both the CEO and CFO departing last year. A new CEO could bring a fresh impetus to the business.

From a bearish perspective, one of its majority shareholders is fast-fashion firm boohoo. You may recall boohoo skyrocketed in popularity a few years back. However, reputation issues and declining performance sent the shares tumbling after a great run. A growing influence through shareholdings from the beleaguered firm is something I’ll keep an eye on.

According to Statista, the health and beauty market is only set to grow. This is good news for Revolution, its potential, and existing shareholders.

Lithium boom

Lithium stocks have some exciting potential, in my view. This is due to the plethora of real world applications that the commodity offers, including in electric vehicles and renewable energy initiatives. All this could mean lithium is in high demand for years to come.

Kodal possesses a developing mining asset, the Bougouni mine in Mali. If it can successfully mine at this asset, there are potentially 220,000 tonnes of lithium-based spodumene readily available for it to sell each year.

The biggest risk for most commodities firms, and more so smaller ones like Kodal, is operational issues as well as mines not yielding the expected output. Furthermore, geopolitical instability in Africa may present issues for Kodal. Plus, mining isn’t a cheap endeavour, a strong balance sheet is important, and often the reason small-cap firms fail.

However, I’m buoyed by the fact that Kodal has a $100m deal with Chinese giant Hainan to get things going. This could help catapult the project, and the business, to new heights. It’s also a sign of confidence in Kodal and its ambitions, if you ask me.

I reckon there’s some potentially exciting times for Kodal. If it can produce the amount of lithium-based spodumene it has mentioned, performance and its shares could soar.

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Beauty in the eye of the beholder

First up is Revolution Beauty Group (LSE:REVB). It sells make-up, skincare and hair products to major retailers, as well as selling online. The firm has grown quickly and went public back in 2021.

At the moment it has a market-cap of £93m. Over the past year the stock has risen by 14%.

The business has endured a tough time over the past couple of years, but excites me because it seems to have left the problems behind now. It had issues with auditing and late publication of accounts, which caused both the CEO and CFO to depart last year. It all seemed a bit murky, but now former boohoo CFO Neil Catto is in the role.

Having an experienced senior management member bodes well for the future. Not only this, but financial results are improving too. The half-year results from last November showed a 20% increase in revenue to £90.4m from the same period the year prior. This helped to boost the pre-tax profit to £0.4m.

The business is 27% owned by struggling fashion retailer boohoo, which can be seen as a risk or a good thing depending on one’s viewpoint. Either way, it will be influenced by the (much larger) fast-fashion retailer going forward.

AI on the open sea

Another penny stock I like is Windward (LSE:WNWD). The maritime artificial intelligence (AI) firm is very unique in what it does, but is still small in size, with a market-cap of £94m.

The share price has jumped by 88% over the past year. I believe this is partly driven by the huge focus on AI companies, as well as the strong results Windward has been putting out.

For example, late last year, it confirmed it had won some large contracts with US government customers. Even earlier this month, a trading update said it “expects FY2023 results to be comfortably ahead of market forecasts”. Both events caused the share price to jump.

As for the AI frenzy right now, it’s clear that many investors believe it’s the future. Does this mean the Windward share price is being expanded by hot air surrounding this technology? I don’t believe so, but it’s certainly a risk to consider.

The stock has moved higher very quickly and could see some retracement lower as investors settle on more realistic expectations of the uses of AI going forward.

I’m thinking about adding both stocks to my portfolio. Both carry risks, so only confident investors should consider buying.

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A top pharma stock

Our need for essential pharmaceutical products and consumer healthcare goods remains largely unchanged at all points of the economic cycle. This is what makes Alliance Pharma (LSE: APH) a great cheap UK share for me to buy if stock markets crash. The company makes products such as Kelo-Cote scar treatment gel, Vamousse lice treatment, and Nu-Seals blood clot prevention tablets, which it sells worldwide.

Alliance Pharma also specialises in acquiring products that have strong brand power and a leading position in the areas in which they trade. This provides an extra layer of protection.

However, I am keeping in mind that an M&A-led growth strategy like this can throw up a world of problems, from disappointing revenues to the buyer being forced to overpay for an asset amid a scarcity of other acquisition opportunities.

A premier UK share to buy

We also need to keep ourselves fed, even during the onset of economic, social, and political crises. This is why I’m thinking of snapping up Premier Foods (LSE: PFD). This food manufacturer makes cakes, custards, cooking sauces and gravies among ranges of other edible products. And its labels such as Mr Kipling, Oxo, and Homepride are ones that shoppers will stretch their shopping budgets to buy.

The food manufacturing industry is packed with competition, of course. And Premier Foods isn’t immune to pressure from other heavyweight brands, or generic supermarket labels. I get confidence from company data showing that its products can be found in 96% of British homes.

I’d also buy Premier Foods despite the threat of rising cost inflation. I think it should be able to effectively pass higher input costs on to its customers.

An unloved nearly-penny stock to buy

The personal goods sector is another which tends to perform robustly when economic conditions worsen. This is why I’m thinking of buying Revolution Beauty Group (LSE: REVB) today. Indeed, I’d buy it following its recent drop to record lows. Revolution’s share price has dipped 23% since its IPO in July.

I believe this almost-penny stock has a bright future as consumers become more conscientious about the environmental impact of their products.

Revolution Beauty is PETA-certified beauty product producer — none of its cosmetics (or product ingredients) are tested on animals. It is also taking steps to aggressively reduce the amount of plastic it uses, while it is bulking up its range of vegan products to latch onto this fast-growing segment.

Of course, the beauty market is highly competitive and Revolution will have to push mighty hard to make an impact. But as a long-term investor, I like its strong green credentials, and think they could deliver great shareholder returns in the years ahead.

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That does not mean that it will stay there. Similarly, a strong stock market debut does not ensure continued share price increases. But to get a sense of which way the tide may turn, I looked for answers to three questions. 

#1. What is Revolution Beauty’s unique selling point (USP)?

Revolution Beauty is a mass market cosmetics producer, but to me its USP is its branding as ‘cruelty free’. This means that there is no animal testing for its products. Further, they are also vegan and often use sustainable packaging. All of this can be a positive in a time of growing emphasis on ethical investing. 

The company was founded only in 2014 and has the vibe of a present day beauty company. It relies on social media influencers for its marketing and heavily encourages inclusion. It has both online and offline partnerships with leading brands. Brick-and-mortar retail partners in the UK include Boots and Superdrug. And for online sales, it has tied up with the likes of Amazon and ASOS. 

#2. How do its financials and its outlook appear?

These partnerships appear to have been the right move for the company. Since its launch, its revenues have almost doubled every year up to 2019. Further, it has also reported underlying profits, though whether this will translate into reported earnings is unknown. 

#3. What is the outlook for Revolution Beauty’s shares?

I think this bodes well for the company, which to my mind is not valued at unsustainable levels. For want of more clarity on earnings, I looked at its price-to-sales (P/S) figures, which are around 3.2 times based on my calculations. This compares well with another cosmetics company, Warpaint London, which has the same P/S as per Financial Times numbers. 

This means that there is room for the company’s share price to rise. Further, keeping in mind that in the foreseeable future, consumer spending is expected to rise as the economy starts growing (relatively) fast, it could encourage further growth in Revolution Beauty’s business. 

Would I buy these shares?

However, for now, I am not going to rush in to buy its shares. I am interested in waiting for at least one update from the company to get a better understanding of where it is at. 

Specifically, I want a clearer picture of its bottom line. If it is unprofitable on a net basis, it would be good to know why. High growth companies have a tendency to focus on market share instead of profits, but I do not know if that is the case with this company. And I certainly do not want to fill in any blanks based on my own conjecture. I will wait for now. 

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