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Why I like this micro-cap stock over Sports Direct plc for the long term

Things have turned almost eerily quiet at Sports Direct (LSE: SPD) over the last couple of months. Its stock has traded within the 290p-300p range and, aside from his rather surprising £31m bid for Agent Provocateur’s UK business, even Mike Ashley appears determined to maintain a low(er) profile. If I were a shareholder, I’d be rather content with this state of affairs, considering how awful 2015 and 2016 were.

But while some may regard a stock trading on just seven times trailing earnings as one worth investigating, I think those investors wishing to profit from our love of sport and exercise should consider a company far lower down the market spectrum.

Top performer

With a market cap of just £36m, AIM-listed Science in Sport (LSE: SIS) is positively tiny compared to the aforementioned FTSE 250 behemoth. Founded in 1992, it produces sports nutrition products (energy powders, isotonic gels and protein bars) and sells these through a range of retail channels, including major supermarkets, specialist retailers and websites.  

Over the years, this market minnow has managed to build up an enviable list of clients, including professional cycling’s Team Sky, British Cycling and USA Cycling. In addition to being the “official nutrition partner” of Liverpool FC, the company also boasts brand ambassadors in Sir Chris Hoy and Katarina Johnson-Thompson.

As a further indication of its increasing popularity, 34 medal-winning athletes or teams used Science in Sport’s products in last year’s Olympic Games. Based on today’s full year results, I strongly suspect it won’t just be sportspeople that begin taking more notice of the business.

A lot of upside

In 2016, revenues sprinted ahead by 30% to £12.2m — a figure “significantly ahead of market growth“, according to the company. Gross profits rose to £7.4m (from £5.5m in 2015) with gross margins hitting 60.3%, thanks to improvements in efficiency.  

Following continued investment, Science in Sport’s e-commerce platform delivered 100% year on year growth in 2016, with new site launches in Germany, Italy, the Netherlands and the USA. After deriving 49% of revenue from online channels in 2016, the company now predicts that it will exceed this number in 2017. Given management’s knack of delivering — its new Australian business “delivered sales ahead of plan” last year — I wouldn’t be surprised if this were the case.

With a promising launch pipeline and “major new technologies” being worked on, I see a lot of upside over the next few years. Indeed, the company reported a “strong start to 2017″, with EBITDA figures for both UK and EU markets expected to be positive this year.

Risk and volatility

So, what’s the catch? Well, it won’t come as a surprise to learn that small companies with ambitious growth plans, operating in competitive markets, require significant and continued investment to grow their market share. As such, it’s important to mention that the company reported an underlying operating loss to the tune of £800,000 in 2016 (up from £250,000 in 2015), with cash levels dipping 30% to £6.13m.

There’s also the fact that investing in smaller companies carries a higher level of capital risk and greater share price volatility, compared with more established businesses on the main index.

So, while I’m bullish on Science in Sport’s future and believe its significant investment will pay off, I’m also tempted to suggest that only those with sufficiently long investing horizons should consider adding it to their portfolios at the current time.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.