When it comes to investing in smaller companies, the risk/reward ratio is somewhat more extreme than among larger stocks. In other words, due to their smaller size, scale and less stable financial outlook, smaller companies can be more risky. However, they also have the potential to grow faster than their larger counterparts, thereby meaning that their reward potential is also very significant.
A Binary Trade?
However, when it comes to risk and reward, Sirius Minerals (LSE: SXX) is rather unusual. That’s because, at the present time, it has no revenue, no forecasts and, as things stand, no mine from which to produce the fertiliser that it hopes to sell moving forward. Of course, this could all change imminently, with Sirius expecting a decision regarding planning approval for its potash mine in Yorkshire in the near future.
Clearly, the outcome of this will have a major impact on Sirius’ share price, with it seemingly being akin to a binary trade at the moment. And, while this means that the potential rewards are high, so too are the risks. As such, it could make sense to look elsewhere for less extreme risks and still very appealing rewards.
One company with excellent future prospects is Restore (LSE: RST). It is focused on document storage and, while this may not be the most exciting of activities to be involved in, it is hugely profitable. For example, Restore has increased its bottom line by 3.4 times in the last three years and, looking ahead, is expected to grow its earnings by 30% in the current year and by a further 11% next year. This has the potential to catalyse the company’s share price and push it higher even after it has risen by 50% in the last year.
Best of all, though, is that Restore currently trades on a price to earnings growth (PEG) ratio of just 0.6, which indicates excellent value for money, Similarly, PR and branding company, Next Fifteen (LSE: NFC), also trades on a hugely appealing rating, with it having a price to earnings (P/E) ratio of just 13.6. This shows that, with growth of 9% being expected for next year and the US and global economies continuing to improve, it could be the subject of an upward rerating over the medium to long term.
Furthermore, Next Fifteen also has an excellent track record of growth, with its bottom line rising in four of the last five years. However, on this front, airline operator, Dart Group (LSE: DTG), has even greater appeal. It has increased earnings in each of the last four years, with growth averaging 27% per annum. And, looking ahead, Dart looks set to benefit from an improving UK economy, with further growth pencilled in for the next two years and its longer term future prospects being upbeat, too.
While the likes of Dart, Next Fifteen and Restore are not without risk, they are established businesses with strong track records, upbeat forecasts and appealing valuations. While Sirius could see its share price rise at a rapid rate moving forward, the risk of significant losses remains high if decisions regarding the proposed potash mine do not go its way. As such, I’d rather buy Restore, Next Fifteen and Dart Group.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.