One growth stock I’d buy ahead of Sound Energy plc

Why I’d choose a safer AIM-listed growth stock over speculative gas producer Sound Energy plc (LON:SOU).

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Perhaps I’m a bit cynical, but when Sound Energy (LSE: SOU) appeared on my radar due to increased investor interest and a soaring share price, all I could think of were the many AIM-listed prospective oil & gas producers that had 15 minutes of fame and hoovered up millions of pounds of investor cash before disappointing in the end.

But maybe it’s different this time. Indeed, on the face of it, there’s plenty to like about Sound Energy: a respected management team with lots of industry experience, a nice thesis about Moroccan gas and European demand, and a solid base of partners including Schlumberger and government-backed Moroccan investment funds.

However, you’ll not find me buying shares of the company for a few very simple reasons. For one, it is still very much in the middle of what will likely be a long and twisting path to discover just how much natural gas lies in the fields it has a stake in.

As current investors know well, this will mean an incredibly volatile share price as good or bad news is released to the public. Furthermore, without knowing exactly how much gas it has an interest in, it’s incredibly difficult to accurately value the business and determine whether or not its current share price is attractive.

Second, while it’s great news that Moroccan investors may pay for the export pipeline and potentially some upstream processing facilities, shareholders will almost certainly still be tapped repeatedly for cash in the many years before production begins. Today’s news that a CFO has been appointed certainly makes a new rights issue likely in my mind, which will, of course, dilute existing shareholders unless they pony up more money.

In the end, Sound Energy could be a once-in-a-lifetime investment opportunity, but as hardened AIM investors will know there’s been plenty of companies before it that have spun a similar tale and gone nowhere.

A safer bet? 

If I were to make a semi-speculative investment on a small AIM-listed company, I’d be much more inclined to consider £150m market cap Alpha FX (LSE: AFX). As its name suggests, the company provides FX consulting and trading services with a focus on UK-based SMEs.

This is an industry that has plenty of competition but I see room for Alpha FX to continue to take market share from smaller competitors as well as the big banks that dominate with around 85% market share. This is because, rather than focusing solely on ginning up commission from sales, the company revolves around dedicated client support managers who offer free consulting services to their clients. This increases client loyalty and also serves to differentiate the company from rivals.

Thus far the strategy is paying off as well as revenue in the half to June jumped from £3.3m to £6.3m year-on-year, as it retained 97% of clients and brought on board new and larger ones. Plus, with operating profits of £2.4m recorded during the period and £14m in net cash on the balance sheet, the company won’t need to tap shareholders to fund expansion anytime soon following its recent IPO. At 36 times forward earnings there’s significant growth already priced-into its share price but I see plenty of reasons to take a closer look at Alpha FX.

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.

Ian Pierce 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.

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