1 ‘secret’ small-cap growth stock I’d consider with Boohoo.com plc

Roland Head explains the secret behind rapid sales growth at Boohoo.com plc (LON:BOO) and highlights another share that he finds interesting.

| 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.

Growth stocks can come in all shapes and sizes. Shares of online fashion retailer Boohoo.com (LSE: BOO) have risen by 680% over the last three years, and the firm is now worth £2bn.

I think further growth is likely, but I’ve also found a £45m minnow which could be worth watching.

Can Boohoo keep climbing?

Boohoo.com’s group sales rose by a stunning 100% during the final four months of last year, compared to the same period in 2016. The secret to the group’s continuing expansion seems to be that it’s discovered a successful growth formula which it is now duplicating.

During the period in question, Boohoo brand sales rose by 25% to £142m. But sales at the newer PrettyLittleThing brand rose by a stunning 191% to £73.8m. And the group already has a third brand lined up that’s still at an early stage. Sales from Nasty Gal reached £11.9m during the four months to 31 December, from start-up in March 2017.

Although the UK still accounts for 59% of revenue, sales growth in the rest of Europe and the USA is equally strong. If Boohoo’s brands can establish a strong reputation in these markets (and Nasty Gal already has a head start as it’s a US brand), they could become much larger.

Are the shares still a buy?

Boohoo.com’s managers are very experienced fashion specialists with a big stake in the business. Under their guidance, annual profit has outpaced sales, rising from £8.4m in 2015 to £27.3m over the 12 months to 31 August.

Strong cash generation has allowed the group to build a net cash balance of more than £100m, providing funding for warehouse upgrades and expansion.

Although a 2018/19 forecast P/E of 49 looks demanding, earnings are expected to grow by around 30% this year and next year. If this pace can be maintained, today’s share price of 180p could soon look quite affordable.

Cleaning up

One growth stock you may not have considered before is AIM-listed Filta Group (LSE: FLTA). This company’s main business is managing deep fat fryers in restaurant kitchens. This is an essential service that has to be performed regularly, and the group currently visits more than 5,000 customers every week.

In a trading statement today, Filta said today that sales for the year ending 31 December are expected to have risen by over 30% to “in excess of £13.25m”. Profits are expected to be in line with market forecasts of £1.6m.

Growth over the last year looks fairly healthy. The number of Mobile Filtration Units rose by 15% to 392 last year. In the UK, the recently acquired FiltaSeal business is said to have delivered “a strong performance”.

US sales currently account for around 80% of revenue, with the remainder coming from the UK. Filta is also expanding into Canada and Germany. The group uses a franchised business model, which normally means that expansion costs are low.

I believe the outlook for shareholders is fairly positive here. One concern is that a slowdown in the restaurant market or a spate of closures could derail Filta’s growth plans. It’s also worth noting that a fair amount of growth is already priced into the shares, which trade on a forecast P/E of 24.

However, the group’s franchise model should limit losses if the market slows. On balance, I believe these shares may be worth a closer look.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com. 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

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

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 »