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Why I’d ditch this falling knife to buy this small-cap growth stock

Velocys (LSE: VLS) has taken another pasting in Friday business after a less-than-welcome reception to latest trading details, the stock last 18% lower on the day and erasing all of the hard-won gains of recent weeks.

The renewable fuel specialist advised that revenues more than halved during the six months to June, to £234,000 from £509,000 in the same 2016 period. And pre-tax losses ballooned to £10.6m versus £7.7m previously.

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Velocys was whacked in large part by the impact of sterling’s slide over the past year, and it advised that it “incurs much of its expense in US dollars and has exposure to the US dollar exchange rate.” As a result the firm suffered an exchange-rate-related hit to the tune of £900,000.

Release fuels investor fears

As well as being prepared for further currency-related woes down the road, investors are also worried about funding issues over at the Oxford business.

It tapped shareholders for £10m in May “to fund the pre-FEED (FEL-2) engineering study for the first biorefinery, to undertake a joint technology demonstration with our partner TRI, and to extend Velocys’ loan arrangement with ENVIA to support the plant in achieving steady state operations.” However, Velocys has advised that it will require additional funding to get its bio-refinery in the US up and running.

The City had already been expecting Velocys to chalk up losses before tax of £14.4m in 2017, but this forecast is likely to receive a hefty downgrade in the wake of today’s release.

And the very real possibility that the pound could continue to struggle, and more operational issues transpire that could whack revenue growth, may also cause the estimated loss of £6.8m pencilled in for 2018 miss to the downside.

In my opinion there is still far too much uncertainty circulating around Velocys right now, and as a result I for one won’t be investing.

Strap in and make a mint

Instead, I would much rather throw my hard-earned cash at industrial bolt and fastenings specialist Trifast (LSE: TRI).

Thanks to the hard work the Uckfield business has put into developing relationships with blue chip OEMs across the globe, and the strength of key sectors like automotive, industrials and electronics, the company continues to enjoy resplendent organic revenues growth in its territories. And Trifast is giving the top line an extra boost through its ambitious M&A strategy — it identified two targets in the first half but withdrew interest “due to their lack of strategic future-proofing” — and the vast sums it is investing in its existing operations.

In its latest trading statement the business advised last week that “our visibility and order pipeline remains very encouraging, whilst our balance sheet is strong,” and this encourages me that the firm can meet sprightly broker projections. Current estimates speak of a 20% earnings boost in the 12 months to March 2017, and an extra 3% rise for 2018.

I reckon Trifast is a great share pick right now given its robust sales momentum and successful self-help programme, not to mention its undemanding prospective earnings multiple of 16.3 times.

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Royston Wild 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.

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