UK shares: one to snap up and one I’d avoid

These two small-cap shares expect long-term growth ahead, but here’s why I’d buy one right now and avoid the other.

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Bus operator Stagecoach (LSE: SGC) delivered its full-year results report today covering the period to 1 May. The figures are mostly dire, of course, because of the pandemic. But one number I do like is the reduction in net debt by just over 11%, from around £352m to just under £313m.

A tailwind in the sector

The company is working on ways to “leverage” the potential from the government’s “transformational” bus strategy for England. And the directors’ vision is of a “modal shift” from car use to public transport via new partnership structures, local bus service improvement plans and more bus priority measures.” On top of that, Stagecoach is bidding for new contracts overseas.

The outlook is positive, but I think progress will likely be pedestrian and Stagecoach will probably not turn into a vibrant growth business in short order. However, I could be wrong in my assessment of the prospects for the business. And growth in earnings could gain traction rapidly and propel the shares higher.

Meanwhile, at 82p, the stock’s already around 45% up from its coronavirus lows of last year. My guess is the fast ‘reopening’ gains have already been made by prescient investors buying near the bottom.

Now, I reckon Stagecoach is one to tuck away for the long haul if the ‘story’ appeals. But I’d rather invest elsewhere, so will be watching from the sidelines. Meanwhile, Stagecoach is hard to value because the directors remain hesitant to issue immediate forward guidance for earnings.

Organic and acquisitive growth

The stock isn’t for me but I do like the look of Bloomsbury Publishing (LSE: BMY). Although the business still generates a lot of its revenue from the Harry Potter series, other business lines are expanding well.

And growth is from organic and acquisitive sources. For example, in early June, the company reported the acquisition of Head of Zeus Ltd (HoZ). The London-based company is an independent publisher of genre fiction, narrative non-fiction and children’s books. According to Bloomsbury’s directors, HoZ has published “many bestsellers, (and) won literary prizes and industry awards.”

Best-selling authors in the HoZ stable include Dan Jones, Cixin Liu, Victoria Hislop, Lesley Thomson and Elodie Harper, “whose The Wolf Den went last week to number five in The Times bestseller list.”  On top of that, Cixin Liu’s bestselling science fiction trilogy, The Three-Body Problem, is being adapted for Netflix by David Benioff and DB Weiss, creators of HBO’s Game of Thrones.

A good fit

Bloomsbury’s directors reckon the acquisition will provide a “strong” addition to the company’s “thriving” consumer division and help to support the firm’s growth strategy.

City analysts expect Bloomsbury’s earnings to grow by just over 10% in the trading year to February 2023. And set against that expectation, the forward-looking earnings multiple is running around 17 with the share price at 346p. I’d describe that as a full valuation. And it’s possible the shares could fall if earnings miss the estimate.

However, I reckon Bloomsbury has decent long-term prospects for growth, so I’d aim to buy some of the shares on dips and down-days. My plan would be to hold for at least five years to give the underlying growth story time to unfold.

However, growth isn’t guaranteed and my assessment of the prospects for the business could prove to be incorrect.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing. 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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