The Motley Fool

Is this small-cap stock a falling knife to catch after dropping 15% today?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Things really have been dire for holders of tool and equipment supplier HSS Hire (LSE: HSS) lately. Since coming close to breaching the £1 mark last November, the shares have almost halved in value as concerns over Brexit have hit the construction industry. 

Unfortunately, today’s interim results have simply poured more petrol on the fire. Over the 26-week period to start of July, revenue at the small-cap fell 3.4% to £160.5m. As a result of “substantial changes” to its operating model, the company booked an adjusted pre-tax loss of £14.2m.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

While reflecting that new sales initiatives and cost savings had allowed HSS to return to profitability in June and should lead to a stronger performance in H2, new CEO Steve Ashmore stated that the rate of recovery had been “materially slower than originally expected“. An update on a detailed strategic review is expected in November but it’s fair to assume that a reversal of HSS Hire’s fortunes is going to take a lot longer than first thought.  

Falling 25% in early trading, shares have recovered somewhat. So, is this a knife worth catching? Not in my view.

Aside from today’s awful set of figures, HSS’s extraordinarily high debt burden and inability to consistently turn revenue into solid profits make it a stock for only the most risk-tolerant, patient investors. Free cashflow is unpredictable at best and there’s no dividend to speak of. While a turnaround isn’t beyond the realms of possibility and some kind of bounce may be experienced as traders speculate that today’s reaction has been overdone, I simply can’t see a recovery being anything but long and painful.

Time to take profits?

Also releasing interim numbers this morning was budget gym operator The Gym Group (LSE: GYM). While its results are far better than those presented by HSS, Gym is another stock I’d sell today if for completely different reasons.

In the six months to the end of June, revenue rose just under 19% to £43m with adjusted pre-tax profits coming in almost 42% higher at £6.5m. Membership numbers climbed almost 20% to 508,000 with the company opening six new sites over H1 and two after the reporting period ended (bringing its total estate to 97 gyms). It now expects to hit the top end of its guidance range for new openings (15-20) over 2017.

Elsewhere, strong cash generation allowed management to reduce the amount of debt by £600,000 to £4.6m. The interim dividend was also raised a healthy 20%, even if the overall yield remains negligible.

Despite all this, I still have concerns over how much investors are expected to pay for Gym’s shares. Before today, the stock was already trading on an expensive forecast price-to-earnings (P/E) ratio of 27. While it’s not surprising that the market liked these figures (Gym’s share price rose 5.5% in early trading), I just don’t see enough upside ahead to warrant this heady valuation. 

With operators competing for the same members in an already saturated market, a lot rests on effective marketing — the costs of which aren’t insignificant. What’s more, memberships are surely among the first things to be sacrificed in the event of an economic downturn — assuming, of course, that people still remember that they have them. With Brexit on the horizon and the stock seemingly stuck in the 175p-210p trading range, I’d be inclined to take any profits sooner rather than later. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.