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2 beaten-down growth bargains set to rebound

Back in August, restaurant rollout proposition Tasty (LSE: TAST) was riding high with a share price around 185p. Today’s 112p represents a fall of around 39%, so what went wrong?

Has the story changed?

Prior to the share-price decline of the last few months, one of the pleasing aspects of Tasty’s progress rolling out a chain of restaurants that are mostly branded Wildwood was the way revenue, profits and cash flow were all rising in proportion together. However, in September with the interim results, Tasty delivered a revenue increase of 28%, adjusted operating profit up 17.5% and a pre-tax loss of £2.3m — something investors hadn’t seen in recent years.

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The loss came as a surprise to many, including me, and arose because of an impairment charge against five sites. Suddenly the story looked much less tasty. Instead of annual double-digit increases in new restaurant openings and juicy trading figures, the firm seemed to be owning up to sites not working out as planned. Maybe the whole rollout concept was flawed?

I don’t think so. Despite the setback, the firm is still opening new restaurants at pace and recruiting for senior roles with a view to supporting the ongoing expansion programme. In November, a placing at 145p to help fund further growth raised around £9m before expenses and, in my view, capped the share price for a while at that level.

My faith in the longer-term potential of this stock remains and I see current poor sentiment for the shares as an opportunity for those who believe the story will have a happy ending. I’m expecting trading figures to get back on track and to see a gently rising share price down the line.

Quality, growth and a stagnating share price

Since January 2015 when the shares stood around 830p, specialist healthcare company BTG (LSE: BTG) has been in the doldrums and today the stock trades at 565p or so. Yet, despite the share-price weakness, it’s hard to detect a flaw in the firm’s record of growth in earnings over that period. Including forecasts for the next couple of years, the compound annual growth rate for earnings runs in excess of 25%.

Growth of the top-line revenue figure looks good too. So the best explanation I can come up with for BTG’s slippage is that the share price maybe went too high on elevated expectations for the rollout of the firm’s new varicose vein treatment in the US. In November, BTG said that sales of the varicose veins treatment Varithena were £1.7m in the first half of the firm’s trading year, which compared to £0.4m the year before. Such a gradual increase doesn’t live up to the excitement and froth that seemed to boost BTG’s share price back in 2015.

The delays appear to be more about insurance coverage than faults with the product, but as we wait for the issues to resolve, BTG is roaring ahead with strong growth from its many other offerings. Today’s share price around 565p puts the firm on a forward P/E rating around 17.5 for 2018, which strikes me as reasonable value for a firm with so much potential growth left in the bag.

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Kevin Godbold owns shares in Tasty and BTG. The Motley Fool UK has recommended BTG and Tasty. 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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