08 Jan Why I’ve bought this small-cap growth stock for 2018
In today’s article I’m going to look at one growth stock I’ve bought recently, plus another I’ve decided to avoid.
A sweet choice?
Patisserie Valerie has become a popular presence on many high streets and in shopping centres. Investors in the company behind this successful rollout, Patisserie Holdings (LSE: CAKE), have seen the value of their shares double since July 2014.
The group’s new stores had an average payback period of just 23 months last year. This rapid payback means that the group has been able to fund its 200-store rollout without borrowing cash. Indeed, net cash rose to £21.5m last year, providing support for a 20% dividend increase.
Is it too late to get on board?
Last year’s financial performance was extremely strong. Pre-tax profit rose by 17% to £20.2m, while the group’s operating margin of 17.6% and return on capital employed (ROCE) of 21.5% highlighted the appeal of this business for investors.
The group plans to open a further 20 stores this year and I’m confident that it’s likely to remain successful, profitable and popular. But I do have some reservations about investing at current levels.
The firm’s earnings per share have risen by an average of 28% each year since 2012. But this key profit figure is only expected to rise by 13% to 18.4p per share during the current year, and by 8% next year.
One reason for this slower growth may be that as the group’s store estate expands, opening new stores has a smaller percentage impact on profits. I’m pleased that management isn’t trying to compensate for this by speeding up store openings, but I’m not sure that the current valuation justifies a forecast P/E of 21.
I’d be interested in these shares at around 300p. But at more than 400p, the price is too high for me today.
One stock I’ve bought
Pawnbroking and personal loan firm H&T Group (LSE: HAT) is the UK’s largest such firm. It’s essentially a kind of banking business, lending against portable assets and providing loans to the sub-prime market.
Shares in the firm rose by 4% today after management said that profits for the full year should be “ahead of current market expectations”. The Sutton-based firm enjoyed a strong fourth quarter, thanks to a good retail performance in the run-up to Christmas.
The pawnbroking business also benefitted from the rising price of gold and a focus on quality watches. These factors helped lift the overall value of the pledge book by 11% to £46.1m last year.
Value and growth
I added this stock to my portfolio shortly after I wrote about it last November. While my timing wasn’t perfect, I’m fairly confident I’ll see a positive return on this investment. Today’s update suggests to me that the group’s three-pronged strategy of pawnbroking, retail and loans is working very well.
Even after today’s gains, these shares continue to trade on a forecast P/E of about 12. With a well-covered yield of 3.2%, I believe this valuation could be an attractive entry point.
Although the firm is exposed to the price of gold and to future regulatory changes, I believe strong management and the group’s large market share should help to mitigate these concerns. The shares remain a ‘buy’, in my view.
A small-cap stock from my watch list
One small-cap stock I’ve been watching with interest is the company featured in 1 Top Small-Cap Stock From The Motley Fool. This UK business has a track record of growth. Uncertainty over the market outlook means that these shares are trading quite cheaply at the moment.
Our experts believe this could be a golden buying opportunity. Their analysis indicates that this stock could rise by up to 78% from current levels.
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- This small-cap growth stock could be a millionaire-maker in 2018
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Roland Head owns shares of H&T Group. The Motley Fool UK has recommended Patisserie Holdings. 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.