One small-cap growth stock I’d buy and one I’d sell today

Harvey Jones picks out an overlooked small-cap that might sit nicely in your portfolio, but is wary of an underperforming luxury fashion brand.

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Luxury designer Mulberry Group (LSE: MUL) has suffered another fashion fail today, with the group reporting profits down 8% over the year to 31 March. This rounds off a disappointing year for loyal investors with the stock trading 29% lower than 12 months ago. It is even down 18% measured over five years.

Mulberry bushed

Today’s report showed reported profit before tax falling from £7.5m in 2017 to just £6.9m, although largely due to start-up costs in Asia. Profit before tax from existing business actually rose 36% to £11.3m, but that was before deducting start-up costs of £2m and net operating expenses of £2.4m.

There was good news in there, with gross margins increasing by 185 basis points to 63.5%, revenue up 1% to £169.7m and retail sales up 3%. The UK was broadly flat but international sales rose 20%. Digital revenues rose 14% and now make up 17% of group revenue (against 15% in 2017). The group’s cash balance stands at £25.1m, up from £21.1m. That is all to the good.

Round and round

CEO Thierry Andretta reported significant progress on its international strategy, creating new Mulberry subsidiaries in China, Hong Kong, Taiwan and Japan, and announcing today a new majority owned venture in South Korea. “Following another period of cash generation, our balance sheet is strong.  Although the UK market remains challenging, we will continue to invest in our strategy to develop Mulberry into a global luxury brand to deliver increased shareholder value.”

So can Mulberry finally show some swagger? I looked at the stock one year ago and said it still has a long way to go. One year on the journey remains market rocky. However, I am encouraged by increased international sales, greater penetration in Asia, and its omnichannel strategy, which is the only way for retailers to survive these days. However, the £465m stock still trades at a whopping 77 times earnings and the dividend yield is low at just 0.65%.

Next Port of call

I are more tempted by another consumer small stock with an outsize international presence, ceramics and cookware firm Portmeirion Group (LSE: PMP), whose brands include Royal Worcester, Spode and Wax Lyrical. My Foolish colleague Paul Summers is also an admirer, noting that although these brands are not big sellers in the UK, they are much more popular in North America.

Big in the States sounds good to me, especially given the strong dollar and weak pound. The stock is up 40% in the last year to 1,280p, and up 450% measured over 10 years. It is a tad expensive as a result, trading at a forecast valuation of 17.6 times earnings, but at least it offers a yield of 2.8%, covered twice.

Warming up

Earnings per share growth forecasts look promising, with 11% expected this year and 7% next. Strong return on capital employed of 23.6% and operating margins of 10.1% strengthen the case for this AIM-traded firm £119m company.

Portmeirion is continuing to grow steadily, in May it reported a 15% rise in total group sales for the first four months of 2018, with group sales up 20% on a constant currency basis over the year. Both stocks have potential, but for me, Portmeirion looks better placed to serve up success.

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.

harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Portmeirion Group. 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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