This cheap stock has surged 49% in the past month. Time to Buy?

THG (LSE:THG) shares have enjoyed a remarkable turnaround recently, surging 49% over the past month. For a stock that’s suffered a torrid few years, this is certainly welcome news for many. Yet despite the pop, I think there’s a strong argument that this cheap stock could keep rallying.

Key drivers

The biggest catalyst that has helped the stock in recent weeks has been improving financial performance. In its October trading update, THG upgraded its full-year adjusted EBITDA forecast to £103m, ahead of analyst expectations of £101.7m. Third-quarter revenue also increased to £408.8m, with its Nutrition division delivering particularly encouraging growth.

THG’s benefited from strong demand for sports nutrition products, alongside an expansion into mainstream retail. Some might have missed it, but partnerships with businesses such as Five Guys and Krispy Kreme are helping the brand reach a much wider customer base.

Another important factor has been falling whey protein prices. These declined around 20% following September’s interim results. Investors aren’t stupid, and therefore will have appreciated that this fall should help to reduce costs and boost future profits.

Perhaps most importantly, management expects THG to generate £25m–£35m in positive free cash flow this year. This would represent its first positive annual free cash flow since going public back in 2020!

Calling it a cheap stock

For some stocks, a 49% jump in a month would make it overvalued. Yet despite the recent recovery, THG’s valuation still looks interesting to me as a long-term investor.

The current market-cap is £656m, compared with £5.4bn at its 2020 IPO. Of course, the business has changed significantly since then. Nevertheless, the discount highlights just how far investor sentiment has deteriorated.

Based on the £103m adjusted EBITDA forecast and that comparative market-cap, the stock still looks cheap to me. I also like the company’s exposure to two attractive consumer markets. Myprotein is benefiting from growing interest in health and fitness, while its Beauty division includes established platforms such as Lookfantastic.

So when I bring this back to the valuation, I’m not sure the stock currently reflects the growth potential of these areas going forward.

Potential issues

Even with this move, the stock’s down 14% in the past year. Over five years, it’s down a whopping 80%. So clearly, an investor still needs to tread with caution.

THG remains exposed to volatile ingredient prices, while its Beauty division recorded a slight revenue decline in the third quarter. Competition is another concern. Sports nutrition is becoming increasingly mainstream, potentially encouraging rivals to compete aggressively on price.

Even with the trading update, it reported a £43.7m statutory loss in the first half. So I need to be careful about getting too excited.

Looking ahead, I think 2027 could be a pivotal year. Lower input costs, expanding distribution partnerships and improving cash generation provide several potential catalysts. I’m seriously considering buying a small amount of THG shares now, then increasing my holding into 2027 if we get more positive reinforcement about the turnaround.

For investors who agree with me, considering the stock could be a good idea.

Should you invest £5,000 in THG right now?

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Jon Smith has no positions in the shares mentioned.