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Is this small-cap growth stock a top recovery play for 2018?

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Serving as another reminder of the dangers of jumping into newly-listed stocks before they’ve had a chance to show their worth, fast fashion business Quiz (LSE: QUIZ) has been a big disappointment for early holders since coming to the market last year.

Perhaps it was the already-rather-rich initial valuation or the gradual realisation of just how much the company will be required to spend on marketing to compete with bigger peers in the hyper-competitive industry in which it operates. Regardless, shares had fallen 25% from their peak at the start of August to 150p before this morning.

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Will today’s Christmas trading update be the catalyst for a sustained reversal in the company’s fortunes? Let’s check the figures.

Questions answered?

In the seven-week period from 19 November to 6 January, group revenue rose just under 32% over the same period the year before. According to today’s statement, this was in line with expectations, reflecting “continued good growth” across the business and an “increasing awareness of the Quiz brand“.

In addition to “strong full-price sales” in the lead-up to the festive break, the small-cap achieved online revenue growth of 119% over the period through its own website and third-party retailers. Overseas sales also soared by just over 51% as a result of new store openings in Spain, decent performance in Ireland and increased sales by its franchisees. In the UK, sales at the company’s high street stores and concessions increased by 11.6%.

While it must be remembered that Quiz was starting from a lower base compared to other companies, these numbers do succeed in making me question whether investors have been too hard on the stock to date. Moreover, Quiz’s price-to-earnings valuation of 23 for the current financial year is softened by a PEG ratio of 1, suggesting that prospective owners wouldn’t necessarily be over-paying for growth. 

Whether the company can replicate the success of other fast fashion rivals remains open to debate and, for this reason, I’m still reluctant to invest. That said, today’s numbers are encouraging and a gradual recovery back to previous highs certainly isn’t out of the question.

Huge potential?

For a complete contrast to the share price performance of Quiz, you can’t do much better than online fashion giant ASOS (LSE: ASC). Despite its already nosebleed-inducing valuation, shares in the £5.7bn cap AIM-listed company rose 32% over 2017. Holders will be hoping for more of the same in the run-up to (and perhaps beyond) the company’s latest trading update towards the end of January.

I see no reason why positive sentiment can’t continue. As well as revealing a strong set of full-year results back in October, the company announced it had increased its sales growth expectations for the 2017/18 financial year to 25%-30%. With improvements to its customer offering (including new payment methods and additional language sites) and more planned investment over the next year, ASOS is now targeting a 60% increase in unit capacity and around £4bn of net sales.

Trading on 71 times forecast earnings for the current year, it is without doubt priced to perfection. Nevertheless, with an increasingly large share of the UK market and “excellent” recent performance overseas, I still think the company is worthy of investment, particularly if CEO Nick Beighton is correct in his belief that the potential for the company remains “huge“.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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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