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One small-cap turnaround stock I’d buy and one I’d avoid

Small-cap investing can be fraught with danger even at the best of times, and when things turn sour, share price movements can be much more pronounced than with their large and mid-cap counterparts. Shareholder concerns can quickly turn to panic, with many investors heading for the exit at the first sign of trouble, leaving a decimated share price in their wake.

High-performance materials

But for those willing to dig deeper and differentiate between short-term issues and more serious underlying problems, there can often be great investment opportunities. I believe international performance materials group Low & Bonar (LSE: LWB) might well offer such an opportunity right now.

The UK-based firm produces advanced, high-performance materials from polymer-based yarns and fibres, which it then weaves and creates into products with exceptional strength and versatility using its own proprietary technologies.

Investors spooked

Low & Bonar’s share price was moving along nicely, up from 65p at the start of the year to around 90p, but things went awry in October, when the group warned that challenging conditions for its Civil Engineering business meant that it was no longer expected to make a profit for the year.

Management stated that although year-on-year revenue was ahead on a constant currency basis, demand for higher value specification projects remains subdued, resulting in an adverse sales mix. Consequently, the expected improvement in financial performance in the second half of the year would not be achieved. Investors were spooked, resulting in a share price drop of 16% following the trading update.

Chinese sales

But I still see Low & Bonar as a solid long-term prospect. The group’s Building & Industrial business unit continues to perform well, as are the Interiors and Transportation divisions, aided by strong sales growth in China.

Despite the recent challenges in the Civil Engineering business, analysts still expect the group to report solid revenue and earnings growth for the full year to November, and pay out an improved dividend. With the forward price-to-earnings ratio now down to just nine for the forthcoming year, and a prospective 4.9% yield, I see Low & Bonar as a bargain growth and income play to tuck away for the long term.

Economic uncertainty

Unfortunately the same can’t be said for another potential turnaround candidate that I’ve been mulling over. In its most recent trading update, the UK’s largest integrated property services group, Countrywide (LSE: CWD), said that the market for housing transactions remained challenging and was likely to be down overall compared with 2016.

The Milton Keynes-based estate agency said that total group revenue for the third quarter was £175.1m, 2% higher than in Q2, but 7% down on the same period a year earlier. Management also warned that it now expected results for the full year to be towards the lower end of market expectations.

The currency economic uncertainty caused by Brexit is clearly having an impact on the number of housing transactions, and until the outlook improves I would be inclined to ignore Countrywide’s cheap valuation which stands at just eight times 2017 earnings.

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Bilaal Mohamed has no position in any 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.