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A small-cap stock I think could be a growth champion in 2020

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In March 2019, my Motley Fool colleague Paul Summers told us he’d sold his stake in Science in Sport (LSE: SIS), as he’d been disappointed by the firm’s earlier promise.

It looks like Paul got it right. Although SiS shares perked up a little a few months later, they’ve crashed back and declined around 20% since the time he was selling.

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SIS is one of those ‘jam tomorrow’ investments that could have great long-term growth prospects, but are as-yet-unprofitable and are still in their cash-burn phase. In late 2017, I’d been cautiously optimistic when the shares were at 72p. Two years on, at 42.8p, it’s clear that would have been a bad time to buy.

Wait for profit?

Many would say wait until the profits start to come in. Yes, you’ll almost certainly miss the biggest potential gains as it’s very likely that a growth share price will have appreciated by the time the firm is making money. But you’ll greatly minimise your chances of holding a crash-and-burn dud.

Yet pondering the excitement of finding a growth stock in its early stages for those who don’t mind the risk, I’m still thinking SiS could turn into that big winner.

And shares in the sports nutritionist blipped up a couple of percent on Tuesday morning in response to a full-year update, ahead of results due on 18 March.

The company described 2019 as having been a landmark year, “representing the first full year of ownership of the PhD brand following its acquisition in December 2018,” and said it “expects to report total sales for 2019 of £50.5m.”

Strong growth

That’s way ahead of 2018’s £21.3m, and apparently represents strong growth for the SiS brand in addition to the PhD acquisition. E-commerce sales (which is an essential part of any new business like this) gained 34% to £16.1m, a significant proportion of total sales.

Getting the company’s brands into Lidl, Aldi and Tesco has also helped lift UK retail sales by 8%, and international retail is up 44% after a major launch in Saudi Arabia.

That all sounds great, so why aren’t I rushing to hit the buy button? It’s all about profits and cash. And there are no real profits forecast before 2021 (not counting the mere £20k suggested for 2020).

At the halfway stage in 2019, SiS reported a gross profit of £11.15m with a gross margin of 44.8%. But it was far from converting that to cash to put into investors’ pockets, as it translated to a £0.6m underlying operating loss.

The cash

At 30 June 2019, we saw cash and equivalents of £5.03m, down from £8m six months previously, and from £10.66m a year prior at H1 2018. At that rate, it could run out before the end of 2020, unless SiS makes great progress in at least breaking even on the cash flow front as early as possible.

My feeling, in line with Paul’s, is that SiS might need a new cash call in 2020 to raise more capital. That would mean dilution, and probably a share price fall.

With my Sirius Minerals failure fresh in my memory, I wouldn’t buy SiS right now — but I’ll think again when those results are out and I can reassess the cash situation.

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Alan Oscroft owns shares of Sirius Minerals. 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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