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One small-cap growth stock I’d buy, and one I’d avoid

Photo: Jim Barton. Licence: http://creativecommons.org/licenses/by-sa/2.0/

The FTSE SmallCap index has delivered a solid 22% gain over the last year. But not all small-cap stocks have been lifted by this rising tide. In this piece I’m going to look at two stocks which have lost more than 20% of their value over the last year.

Not as cheap as it seems

At first glance, housebuilder Inland Homes (LSE: INL) looks good value. At 62p, its shares trade at a 28% discount to their post-tax EPRA net asset value of 87.05p per share. The forecast P/E of 2017 is just 9.3 and the stock offers a 2.1% yield.

When a housebuilding stock trades at a discount to net asset value, it usually means that the firm’s assets in their current state are thought to be worth more than the share price. But Inland’s use of the EPRA net asset value alters this. The EPRA calculation — a European standard — allows companies to include “unrealised value within projects” within their calculation of net asset value.

This makes a big difference. Inland’s balance sheet net asset value is £118m, or 55.3p per share. But the company expects to make a profit of £67m, or 31.4p per share, from its current projects. Adding these two figures together gives the EPRA net asset value of 87.05p.

The risk is that this unrealised value depends on market conditions remaining favourable in the future. So I think it’s reasonable for the shares to trade at a discount to EPRA NAV, especially as Inland has net debt of £61m and seems to lack the strong free cash flow of larger housebuilders.

In my view, the balance sheet net asset value of 55p per share is probably a good guide to the fair value of the stock. I’d rate this firm as no more than a hold at current levels.

This stock could sail away

One stock I have bought recently is shipping broker and marine services group Braemar Shipping Services (LSE: BMS). Shares in this firm have fallen by 29% over the last year, as weak market conditions have caused profits to tumble. But Braemar stock has risen by 24% over the last month.

What’s interesting to me is that this surge of buying comes ahead of next week’s full-year results. This suggests to me that investors in the market believe the shares have been oversold and that Braemar’s full-year results will put a more positive spin on the outlook for the firm.

One potential attraction is the group’s dividend. In a trading update in January, Braemar reported a net cash balance of £1.7m and indicated plans to pay a final dividend of 9p per share for the year to the end of February. That gives a total dividend of 14p for the year, equivalent to a yield of 4.3%.

Broker consensus forecasts suggest that Braemar’s profits will rebound sharply this year, helped by the start of a recovery in the oil and shipping markets. Current estimates indicate that the after-tax profit could climb from £2.4m to £6m in 2017/18.

This would put the stock on a forecast P/E of 14, with a prospective yield of 4.4%. In my view, that’s an attractive entry point, given the group’s net cash balance and history of strong cash generation.

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Roland Head owns shares of Braemar Shipping Services. The Motley Fool UK has recommended Inland Homes. 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.