The shares of smaller companies can often move up — or down — dramatically on the release of their results. On such occasions, investing ahead of imminent results can bring big rewards in short order — or an equally hefty fall in the value of your investment.
If you’re a long-term investor, looking for a nice kick-start to your investment — as opposed to a short term trader — you’ll want to be convinced that you’re buying into a good business.
I believe fast-fashion etailer Boohoo is a good business, and that the barriers to new entrants to online fashion are higher than many people may think. Boohoo is run by canny rag-trade veterans with long-standing sourcing relationships, which aren’t easy to replicate, and is of a scale to market heavily (essential for success in this type of business), while new entrants typically lack the requisite capital and cash flows.
As the table below shows, Boohoo is highly cash generative, its operating cash flows growing rapidly ahead of the amount of cash it invests.
|Net cash from operating activities (£m)||1.9||1.5||5.6||5.9||12.2||27.1|
|Net cash used in investing activities (£m)||1.7||0.3||4.6||4.6||7.8||19.0|
Boohoo disappointed early investors when the market pumped the shares up to a silly valuation, then sent them crashing when the company had a hiccup with a new warehouse IT system that delayed the launch of last year’s autumn/winter range.
The shares currently look good value at 30.75p, with cash on the balance sheet of over 5p a share. The forecast cash-adjusted price-to-earnings (P/E) ratio for the current year is 24, falling to 19 next year, which appears generous for the growth on offer.
Boohoo last updated the market in June, and I think the company has potential to surprise on the upside in its half-year results next Tuesday. My impression is that there’s been some intense marketing during the period and I suspect there’ll also be good news on the early performance of the company’s recently-launched app. All in all, I would rate Boohoo as a buy today.
Mobile solutions firm Globo is also scheduled to release its half-year results next Tuesday. My fellow Foolish writers are resoundingly bullish on this stock, marking it down as a top pick, and pointing to a P/E ratio of 3.2 and a PEG ratio of 0.2, among other things. You may want to have a look at those articles for some positive balance to my rather more negative take on Globo.
My first concern is that those bargain ratios are simply way too low for a high-growth company. The market is effectively saying that there is something wrong with the business. I think it’s instructive to look at the same cash flow measures that I looked at for Boohoo.
|Net cash from operating activities (€m)||2.7||5.0||13.2||20.6||31.0||72.5|
|Net cash used in investing activities (€m)||7.1||13.0||18.3||19.3||32.8||90.5|
As you can see, Globo’s profile is the mirror opposite of Boohoo’s virtuous habit of funding its investing activities from its operating cash flows. Can Globo only grow by spending more cash on investing than it brings in from its operations? Globo has today announced that another acquisition (for €14m) is in the offing. The company is also currently trying to raise $180m by issuing high-yield bonds for yet further acquisitions.
I’m unconvinced by Globo’s business, but, if you’re positive about the company, should you invest ahead of the results? Well, if Globo really is the bees knees, the trading multiples won’t stay as low as they are now forever!
Asian Citrus is due to release its annual results on Friday. This is an AIM-listed Bermuda-registered holding company that owns, through its subsidiaries, fruit plantations in the People’s Republic of China (PRC).
Asian Citrus was admitted to AIM just over 10 years ago, and so has lasted longer than many holding companies of PRC businesses that have come and gone from AIM, leaving investors with little or nothing. Concerns have been expressed about Asian Citrus’s related party transactions and asset valuations, while weather problems and crop diseases seem to regularly blight performance.
I don’t consider Asian Citrus to be investment grade material. The company warned earlier this month that it expects to report lower turnover and “significantly higher” losses than last year. I suspect results-day risk for the shares may be on the downside, because “The audit now being conducted by the auditor of the Company on the management accounts has not yet been completed and the management accounts may still be subject to adjustments”.
High-growth smaller companies can provide a big boost to your portfolio, and I think Boohoo currently looks like a winner. I'm also interested in another small cap that has just been identified by Mark Rogers, the Motley Fool's Head of UK Investing, as a stock with outstanding upside potential for investors today.
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G A Chester 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.