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1 emerging growth stock I’d buy and one fallen dividend hero I’d sell

Today, I’m looking at a ‘risky’ emerging growth stock I’d be happy to buy, and at a one-time ‘safe’ dividend stock I’d sell because it looks far too risky.

Multinational, multi-sector prospects

Shares of AIM-listed Optibiotix Health (LSE: OPTI) are trading down about 3% today after a decent run-up in advance of its half-year results, which were released this morning.

With a pipeline of patent-protected products, which modulate the human microbiome to tackle such things as obesity, high cholesterol and diabetes, Optibiotix has stimulated interest from national and multinational companies in both consumer health and pharmaceutical markets. Indeed, it has already penned agreements with, among others, Tata Chemicals, one of India’s leading suppliers of food ingredients and HLH BioPharma Vertriebs, one of Europe’s leading suppliers of probiotics to the pharmacy market.

Commercial take-off

Today’s results for the six months ended 31 May showed revenue of a mere £75,000, compared with cost of sales of £35,000 and administrative expenses of over £1m. Nevertheless, the company reported a statutory profit of £3.2m. This was due to it de-merging and giving a separate AIM listing to its majority-owned skincare subsidiary, Skinbiotherapeutics, leading to an uplift in the value of its investment.

While the income statement showed a profit and the balance sheet a nice increase in net assets, the cash flow statement recorded cash burn of £1.2m. Nevertheless, Optibiotix retains cash of £1.9m, which it says is “sufficient to cover the delivery of existing development and commercial plans.”

With the company targeting a number of “large markets (>£100m) where there are high growth opportunities (CAGR >10%) and a large unmet need” this £54m cap company — at a current share price of 68.5p — could grow rapidly as current and future commercial deals take off. The shares look very buyable to me as a higher-risk-but-potential-very-high-reward proposition.

All not as it seemed

Until recently, many investors viewed support services firm Mitie (LSE: MTO) as a steady growth and reliable dividend stock. Earnings growth had supported annual dividend increases that had taken the payout from 1p a share in 2000 to 12.1p a share last year.

However, all was not as it seemed, with the company increasingly betraying signs of aggressive accounting — and perhaps worse — as I explained when I tagged it The one FTSE 250 stock I’d sell ASAP in May. As this has all begun to unravel, I was expecting some serious ‘kitchen-sinking’ in its annual results on 12 June and a discounted fundraising to shore up the balance sheet at some point, well below the share price of 211p at the time I was writing.

Can of worms

The kitchen-sinking didn’t happen to the extent I expected and, while the dividend was suspended, there’s so far been no fundraising. The shares are currently trading at 267p but I maintain my ‘sell’ stance on the basis of my conviction that there are more worms to come out of the can.

My conviction is only strengthened by Mitie announcing yesterday that the Financial Conduct Authority has launched an investigation into the “timeliness” of its profit warning last September and, more importantly, into “the manner of preparation and content of the company’s financial information, position and results” for its last financial year.

Don't forget Brexit

Mitie's business has suffered to some degree by the uncertainty of Brexit, while Optiobiotix's success, if it comes, will be little influenced by the macro climate. Which just goes to show that the UK's withdrawal from Europe has different potential implications for different industries and companies.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.