Why I’d buy shares in this newly-listed, dividend-paying and growing small-cap

It can pay to get in early with a growth story and I’m tempted by this recent addition to the stock market.

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The general stock market retreat we saw at the end of 2018 has depressed the share prices of many good firms, and not all of them are in the FTSE 100. I think some decent opportunities have opened up in the small-cap space, such as with multi-channel specialist retailer Works.co.uk (LSE: WRKS), which trades under the brand The Works.

You might have come across one of the firm’s 484 stores, or its website. They sell gifts, arts, crafts, toys, books and stationery. I hesitate to describe the company as a value retailer because I remember the days before the firm was taken over in 2008 by a company called Endless LLP. In my experience, pre-2008, the stores offered unmissable bargains in books and other items but, to me, the in-store prices these days aren’t as compelling as they were. However, Endless LLP reinvigorated the firm’s offering and provided the impetus for the current impressive growth trajectory.

New to the stock market

The company arrived on the stock market with its Initial public offering (IPO) last July, which put its firmly on my radar for interesting opportunities. Well-known successful US investor and trader Mark Minervini said in his book, Trade Like a Stock Market Wizard, that the biggest part of a company’s growth usually occurs within the first five to 10 years following its IPO. He reckons “that crucial period is when management tends to be at its entrepreneurial best.”

Today’s interim results report reveals a net 32 new stores were opened in the six-month period to 28 October, and the firm expects to have opened a net 50 new stores for the full year. There seems no doubt that the management team is ‘going for it’ when it comes to growth. My Foolish colleague Roland Head pointed out that the Card Factory’s founder, Dean Hoyle, invested in The Works in 2015 and became the firm’s chairman.

Roland explained that Mr Hoyle grew Card Factory from a market stall to a company with annual profits of £50m in just 12 years,” which I think is an impressive indicator of his entrepreneurial credentials. Although he sold a few of his shares in The Works in the IPO, his holding is still an impressive 14%, or so, which means he’s got a lot riding on the outcome of the growth strategy, and he’s aligned with investors like us.

Trading well

The firm said in today’s report that revenue increased by 15% compared to the equivalent period last year, with like-for-like sales up 3.8%, which suggests the firm’s offering is resonating with its customers. Sales momentum continued through the Christmas period, although the company reported a first-half loss rather than a profit, because of the second-half weighting of the business. City analysts following the firm expect robust double-digit percentage advances in full-year earnings, so I don’t think the first-half loss is much to worry about.

The great thing is that the share price has fallen since the IPO. Today’s 135p, or so, puts the forward earnings multiple for the trading year to April 2020 at just over 11, and the forward dividend yield is around 3.5%. I’m tempted to hop aboard the growth story by buying some of the firm’s shares. 

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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