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Today’s 10% share price fall has created a buying opportunity at this small cap

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Today has seen the release of a disappointing set of results by small company Character Group (LSE: CCT). The impact of its numbers on its share price has been significant, the price being down by as much as 10% Friday morning. Clearly, investor sentiment has been hurt by the update, but now could signal a buying opportunity. Although volatility and further share price falls can’t be ruled out, in the long run the business could prove to be an excellent buy.

A difficult outlook

The toy company, best known for its Peppa Pig and Teletubbies, brands has stated that it expects results for the first half of 2017 to be lower than in the same period of 2016. In the four months to December 2016, sales were marginally lower than in the comparable period and, as expected, UK gross margin was negatively impacted by the devaluation of sterling.

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While disappointing, the company expects to meet market expectations for the 2017 financial year. It has taken steps to mitigate the reduction in margin, which are starting to have an effect. They will be fully implemented during the second half of the year. Furthermore, the reaction to the 2017 product range and marketing plans has been excellent and the business is confident that the new season’s offerings will allow it to deliver results that are in line with guidance.

A buying opportunity

The consumer goods market is never a stable place in which to invest. Companies such as Character Group and Express Gifts owner Findel (LSE: FDL) endure improving conditions for a period of time, which are inevitably followed by a much more challenging environment.

However, crucially, Character Group remains upbeat regarding its guidance for the 2017 year. As such, now could be a good time to buy it, as it trades on a price-to-earnings (P/E) ratio of just 9.7. This indicates that the company offers a sufficiently wide margin of safety to merit investment, as even if profit comes in below expectations then it may still prove to be relatively cheap.

However, its P/E ratio remains higher than that of Findel. The latter has a P/E ratio of 8.8 and a better outlook than Character Group over the next couple of years. Findel is expected to record a rise in its earnings of 11% in 2018 and 14% in 2019. This puts it on a price-to-earnings growth (PEG) ratio of only 0.7, which indicates that its shares are highly attractive. That’s especially the case since Character Group’s outlook is now less certain than it was previously.

Of course, both stocks remain relatively risky. Brexit and a potential slowdown in consumer spending could hurt their financial performance. However, with such low valuations they both seem to be worth buying, with Findel offering the most upside due to its lower valuation and superior growth prospects.

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Peter Stephens owns shares of Findel. 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.

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