A small-cap recovery stock I’d buy after its 20% fall

Small-cap oil engineering firms might look risky right now, but here’s one that’s firmly on my buy list.

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Don’t you hate it when you check stock market movements and see one of your favourites heading the list of the morning’s fallers?

That’s the case with Goodwin (LSE: GDWN), whose share price fell 20% at one point on Thursday. The company, which makes valves, pumps, and related items used in the oil and gas, and mining businesses, looked like it was recovering well from a slowdown caused by the oil crisis, and I’ve been getting quite bullish about it.

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But first-half underperformance has hit confidence, with pre-tax profit for the six months to 31 October dropping 5.1% from the same stage a year previously, to £7.4m, even though turnover was up 3.8%.

Brexit

Chairman TJW Goodwin described it as “a feature of the disruption caused by the commotions in our parliamentary system over the past six months where the uncertainty has temporarily stalled projects.” And the exec added: “With further clarity over Brexit, we will be looking to start capitalising from the tremendous success our group companies have had in winning large amounts of business from new market areas.”

Net debt is up a little, but at £27.2m, it represents gearing of only a very modest 25.7%, so I see no balance sheet issues to be concerned about.

I’ve always seen Goodwin as a well-managed company, with keen control of cash flow. And with strong family ownership, there’s little need to focus on satisfying the short-term demands of institutional investors, analysts and stock market commentators.

Goodwin is very much on my buy list.

Uptick

In a similar business, but moving in the opposite direction Thursday, is Lamprell (LSE: LAM). The firm, which provides engineering and contracting services to the oil and gas industry, saw its shares pick up 10% during morning trading, but before we get too excited, we need to look at the bigger picture.

Back in 2018, I examined Lamprell as a recovery candidate, but I concluded that “the risk/reward ratio that the company currently offers appears to be relatively unappealing,” and unfortunately the time since then has borne that out. Since I wrote those words, the Lamprell share price has lost a third of its value, largely due to a steady decline since the end of May this year.

Debt

That decline was getting worse, and it’s only since a debt extension announced on 9 December that the price has been inching up a little. The extension takes the firm’s current debt facility of $30m to 14 April 2020, so there’s some breathing space. And Lamprell is in discussions “with a syndicate of international banks in respect of a new banking facility,” which should reduce the pressure further.

But it recorded a net loss of $51.9m for the first half of the year, and losses are expected to continue at least until 2020.

It may well turn out to be a good long-term investment, but I just see too much risk in investing in a company struggling to recover from several years of losses, at least until I see signs of a return to profit. Sure, I’ll miss the bottom that way, but it greatly reduces my chances of a wipeout.

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Alan Oscroft 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.

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 considered, so you should consider taking independent financial advice.

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