Forget the UKOG share price, I’d buy into this profitable small-cap instead

Give me this company’s well-balanced returns over the excitement of UK Oil & Gas plc (LON: UKOG) any day.

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The world of highly speculative, profitless oil exploration shares is very exciting. But jam-tomorrow propositions such as UK Oil & Gas (LSE: UKOG) have a nasty habit of making many long-term-focused investors poorer rather than richer over time.

Speculation-driven volatility

Just look at the share price action. The stock was around 1p in June 2017, more than 8p by September that year, flirting with 1p again in June, and around 2.28p today. If you’d bought the shares somewhere close to 8p you’d be sitting on a nasty loss. If you’d bought near a penny, you’d have doubled your money. If you’d bought at a penny and sold at 8p you’d be laughing. But to do that would have required a trader mindset rather than the long-term approach of the average investor.

I reckon such movements are driven in the first place by company news flow, but exaggerated enormously by investor speculation. Meanwhile, a longer holding period leaves investors exposed to the firm’s potential upside and to its potential risks, which are many. My Foolish colleague Rupert Hargreaves recently punched out an article describing how UKOG is finding it difficult to get oil out of the ground and how the firm has been diluting its investors by raising funds to keep trading. Maybe oil will flow in commercial quantities in the end and cash will find its way into UKOG’s coffers. But will it come in time for those owning the shares now to benefit? That’s a question impossible to answer.

Well-balanced, profitable growth

So, I’d forget about UKOG altogether and go for a profitable, growing company such as Anpario (LSE: ANP). The firm has nothing whatever to do with oil exploration, which I see as a good thing. Instead, it earns its living as a producer and distributor of natural feed additives for animal health, hygiene and nutrition.

Trading figures in today’s half-year report look decent with constant currency exchange rate revenue coming in 5% higher than the equivalent period a year ago, while diluted earnings per share moved 14% higher. The directors seem confident in the outlook because they pushed up the interim dividend 10%. Chairman Peter Lawrence told us in the report that Anpario’s business development strategy will “progressively improve sales and distribution, while control of costs will ensure that they do not move ahead of the growth we achieve.” 

One of the things I like is the £12.6m cash pile sitting on the balance sheet, and the absence of any borrowings. On top of that, the firm’s record of cash generation from operations is excellent – steady, rising, and robustly supporting earnings. The share price has doubled since the middle of 2016, which challenges the performance of speculative outfits such as UKOG, but with far less ‘excitement’.

Looking forward, City analysts following the firm predict advances in earnings for 2018 and 2019 of around 10% each year. I reckon the balanced nature of this growth — which is likely to be backed with solid cash inflow — is well worth going for. I rate the shares as ‘attractive’. 

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.

Kevin Godbold 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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