Two small-cap UK shares that could explode in the long run!

Small-cap UK shares are inherently more risky investments than their mature FTSE 100 counterparts. But they can also be very lucrative investments.

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When I’m investing for growth, I don’t tend to spend too much time looking at UK shares — I prefer the US and China. However, UK small-cap stocks can be more appealing for growth-focused investors. The caveat is that they can drop in value as quickly as they can rise. 

So here are two small-cap UK stocks. They both sit just outside penny stock territory — for different reasons — and both could benefit from long-term trends relating to premiumisation and sustainable consumption trends.

Mulberry

Mulberry (LSE:MUL) stock has underperformed over the past 12 months. The luxury goods brand reported a 4% fall in revenues for 2023 as demand for high-end products slumped.

In the final quarter of 2023, revenues fell 8.4% compared to the previous year. With earnings moving into the red, the share price has sunk, falling 55% over 12 months. The stock currently has a market-cap of £63m and is trading just outside of penny-stock territory at 110p. 

Thankfully, Mulberry isn’t an outlier in the luxury goods sector. LVMH, Kering, and Burberry are among the big names that alerted us to falling demand in the sector. China’s a notable proponent of this falling demand.

However, in the long run, I’d expect to see Mulberry benefit from positive trends in sustainable fashion and a movement towards premium buying trends. High-end fashion stocks tend to trade at high multiples because of the premiumisation trends and strong margins.

But Mulberry’s currently loss-making, and it’s trading around 18 times earnings from 2022. So it’s hard to say the company looks particularly cheap.

Mulberry’s in dire need of a change of fortunes. It’s certainly possible, with the company making sensible investments in new stores in Australia and Sweden as well as ongoing investments in technology aimed at supporting future growth.

But I’m not investing in Mulberry until I see more signs of a turnaround. However, in the long run, I would be surprised to see this stock explode. 

Chapel Down

English wine’s on trend. It’s unique, it’s award-winning, and while output is just a fraction of Italy, France, and Australia, investments in new acreage over the past five years have resulted in rising volumes. 

Chapel Down’s (LSE:CDGP) at the forefront of the British wine industry, producing around 30% of total volume. Situated on Kent’s chalky terroir, Chapel Down produces high-end, award-winning wines as well as some of England’s most reasonably priced bottles. Its volume, range, and quality have allowed it to become the country’s leader in terms of market penetration and brand awareness. 

The company’s already benefitting from premiumisation trends. Young consumers especially are increasingly keen on trying new and more premium wines. Anecdotal evidence suggests this trend started during the pandemic when people had little else to spend their money on.

However, those who bought more premium wines haven’t reverted to buying cheaper as they may have done before the pandemic. Equally, Gen Z is drinking less — that’s a worry — but is targeting better quality products. 

It’s currently a bit on the expensive side, trading around 70 times earnings. But it’s on a strong growth trajectory, with sales expected to register a double-digit increase in 2024. It also has £34.3m of assets, including £22.6m of wine stock. 

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.

James Fox 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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