Today’s 10% share price fall has created a buying opportunity at this small cap

This smaller company could be worth buying for the long term.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today has seen the release of a disappointing set of results by small company Character Group (LSE: CCT). The impact of its numbers on its share price has been significant, the price being down by as much as 10% Friday morning. Clearly, investor sentiment has been hurt by the update, but now could signal a buying opportunity. Although volatility and further share price falls can’t be ruled out, in the long run the business could prove to be an excellent buy.

A difficult outlook

The toy company, best known for its Peppa Pig and Teletubbies, brands has stated that it expects results for the first half of 2017 to be lower than in the same period of 2016. In the four months to December 2016, sales were marginally lower than in the comparable period and, as expected, UK gross margin was negatively impacted by the devaluation of sterling.

While disappointing, the company expects to meet market expectations for the 2017 financial year. It has taken steps to mitigate the reduction in margin, which are starting to have an effect. They will be fully implemented during the second half of the year. Furthermore, the reaction to the 2017 product range and marketing plans has been excellent and the business is confident that the new season’s offerings will allow it to deliver results that are in line with guidance.

A buying opportunity

The consumer goods market is never a stable place in which to invest. Companies such as Character Group and Express Gifts owner Findel (LSE: FDL) endure improving conditions for a period of time, which are inevitably followed by a much more challenging environment.

However, crucially, Character Group remains upbeat regarding its guidance for the 2017 year. As such, now could be a good time to buy it, as it trades on a price-to-earnings (P/E) ratio of just 9.7. This indicates that the company offers a sufficiently wide margin of safety to merit investment, as even if profit comes in below expectations then it may still prove to be relatively cheap.

However, its P/E ratio remains higher than that of Findel. The latter has a P/E ratio of 8.8 and a better outlook than Character Group over the next couple of years. Findel is expected to record a rise in its earnings of 11% in 2018 and 14% in 2019. This puts it on a price-to-earnings growth (PEG) ratio of only 0.7, which indicates that its shares are highly attractive. That’s especially the case since Character Group’s outlook is now less certain than it was previously.

Of course, both stocks remain relatively risky. Brexit and a potential slowdown in consumer spending could hurt their financial performance. However, with such low valuations they both seem to be worth buying, with Findel offering the most upside due to its lower valuation and superior growth prospects.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Findel. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »