One FTSE SmallCap Index growth stock I’d buy, and one I’d sell

G A Chester’s calls on these two FTSE SmallCap Index (INDEXFTSE:SMX) growth stocks could be controversial.

| 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.

Engineer Goodwin (LSE: GDWN) and nearly-new car dealer Motorpoint (LSE: MOTR) are constituents of the FTSE SmallCap Index. Both rank towards the lower end, with market caps of £150m and £220m, respectively.

I believe one of these stocks currently offers excellent value and I rate it a ‘buy’. I see the other as having hidden risks that lead me to give it a place on my ‘sell’ list.

Re-rating potential

Formerly a growth stock for a good number of years, Goodwin’s annual earnings advances ground to a halt — nay, went into reverse — in the wake of the oil and metals prices crash. The company said in its recent half-year results that while oil has recovered to over $60 a barrel and iron ore to over $60 a tonne, “there is little reason to expect an upturn in the release of orders for new capacity in these capital equipment-needy markets until 2020.”

However, Goodwin hasn’t been idle in winning business in new markets, such as nuclear recycling and decommissioning, while its refractory engineering business is also growing. Established in the nineteenth century and still run by descendents of the founders, the company is prudently managed to be resilient through cyclical downturns. It’s remained profitable and maintained its dividend during the recent challenging period. Net debt remains relatively conservative at £27m, particularly as we’re at the bottom of a cyclical trough.

A trailing 12-month earnings multiple of 23 may not appear particularly good value but investors are beginning to recognise that the company is returning to growth. A measure of the potential re-rating over the next few years is that the current share price represents less than eight times previous peak earnings. For these reasons, I rate the stock a ‘buy’.

Downside risk

On the face of it, Motorpoint’s trailing 12-month earnings multiple of 13.8 appears reasonable value and its balance sheet solid, with £21.4m cash and no debt. However, I have several concerns that persuade me to rate the stock a ‘sell’.

Car sales have boomed in the easy credit environment since the financial crisis. The numbers and proportion sold via financing deals have risen mind-bogglingly. And of course, companies involved in flogging cars have seen terrific increases in their profits.

From time to time you get a spate of stock market flotations in a particularly ‘hot’ sector that often turn out to be at or near a cyclical high. Motorpoint’s flotation last year followed those of Auto Trader and BCA Marketplace (owner of WeBuyAnyCar) the year before. However, this year, new car sales have fallen off a cliff and sales of second-hand vehicles dipped for a second successive quarter in July-September.

As well as being exposed to the general state of the economy, Motorpoint relies on various finance facilities to fund its operations, including stock financing secured against its retail vehicle stocks. It concedes that a change in pricing, facility limits etc “could significantly constrain the Group’s ability to trade or the Group could be required to dispose of assets at below their market value or at a substantial discount.”

The company had £90m of inventory at its latest balance sheet date, as well as other assets that could be adversely impacted by falling sales and prices. I see risk of a significant downturn, which isn’t discounted in the current share price.

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 considered so you should consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Goodwin. 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.

More on Investing Articles

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

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Down 75%, has the Deliveroo share price bottomed?

The last 12 months have been torrid for the Deliveroo share price. But does this open an opportunity to grab…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Is now FINALLY the time to buy Lloyds shares?

Lloyds shares have leapt in value as market confidence has improved. Should I buy the FTSE 100 bank before it…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »