Is this property penny stock one to buy or avoid?

a couple embrace in front of their new home

A penny stock I’m considering adding to my holdings currently is Foxtons (LSE:FOXT). Volatility in the housing market due to macroeconomic factors is something I must consider, however. Let’s take a closer look at whether I should buy Foxtons shares or not.

Estate agents

As a quick reminder, Foxtons is London’s leading estate agency. It currently has approximately 50 interconnected branches throughout the city and a workforce of over 1,000 employees. The Foxtons website receives nearly 10m visits per year.

A penny stock is one that trades for less than £1, Foxtons shares are currently trading for 40p. At this time last year, the stock was trading for 54p, which is a 25% decline over a 12-month period.

A penny stock with risks

One of the biggest risks I see with Foxtons shares is the action the Bank of England (BoE) is taking to combat soaring inflation. The BoE has increased the base interest rate, which means mortgage payments are now higher too, and obtaining a mortgage is also more difficult. London house prices have always been higher than average but it seems buying a property there is harder than ever. Some even anticipate a housing crash could be on the horizon. Even a bear housing market could impact a business like Foxtons.

Next, Foxtons has impressively grown into London’s leading agency but the national market in the UK is vast. Foxtons does not have much of a presence outside London, which means it is heavily reliant on a market that is saturated and where competition is growing every day. Competition and a lack of diversification in terms of location could hurt performance and returns.

The bull case and my verdict

So to the positives then. I saw that Foxtons has a decent track record of performance. I am aware that past performance is not a guarantee of the future, however. Looking back, it has grown revenue three out of the past four years, with the pandemic-affected 2020 seeing a small dip in levels.

Next, Foxtons’ growth story to date is a positive point too. The London housing market is vast and lucrative, so to be able to navigate its way to the top of this is impressive. House prices in London are statistically higher than the rest of the country. This tells me that there is lots of money to be made for estate agents and Foxtons could leverage its position to profit here. This would boost its balance sheet and potential returns too.

Finally, Foxtons shares currently pay a dividend that would boost my passive income stream. Its current dividend yield stands at just over 1.2%. A penny stock that pays a consistent dividend is not easy to find. I am aware, however, that dividends are never guaranteed.

Overall, I would be willing to open a small position in Foxtons shares. Its unrivalled position in the London market is a big factor in this, as well as the passive income opportunity. As a penny stock, I am expecting some volatility, especially currently due to macroeconomic headwinds.

The post Is this property penny stock one to buy or avoid? appeared first on The Motley Fool UK.

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Jabran Khan 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.