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Why I’d sell this small-cap star but buy this FTSE 100 stock

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Gold-mining and money-lending are two industries that have been around for thousands of years. Randgold Resources (LSE: RRS) and sub-prime lender S&U (LSE: SUS) may not have histories stretching back quite that far — they were founded in 1995 and 1938, respectively — but they have delivered impressive returns for investors over multiple decades.

Recently, the picture has been one of contrasting performance, with FTSE SmallCap S&U up around 20% since the start of the year and FTSE 100 giant Randgold down by a similar order. Here’s why I’d sell the soaring small-cap stock but buy the out-of-favour blue-chip.

Advantage S&U

S&U sold its home credit arm in 2015, leaving Advantage Motor Finance as its core business. In its annual results, released in March, the company reported an 18th successive year of record profit at Advantage. Pre-tax profit increased 20% to £30.2m on 30% higher revenue of £78.9m.

Management said today, in a Q1 update ahead of the company’s AGM, that trading “remains strong.” This bodes well for City analysts’ forecasts of a further 20% rise in pre-tax profit this year (to £36.3m) and a 17% increase in earnings per share (EPS) to 238p.

At a current share price of 2,700p, S&U’s market capitalisation is £324m and the forward price-to-earnings (P/E) ratio is 11.3. The P/E appears cheap for the EPS growth forecast. Furthermore, a well-covered 119p forecast dividend adds a generous prospective yield of 4.4%.

Bubble waiting to burst?

Interest rates have been at historically unheard of lows for the best part of a decade. This has fueled a rise in UK household debt to unprecedented levels, a notable part of which has been a vast increase in the number of cars bought on credit. The big concern I have about S&U is that car finance looks to me like a credit bubble waiting to burst.

Current interest rates, employment figures and a recent upturn in wage increases above inflation may reduce the immediate risk, but erring on the side of caution, I’m inclined to see S&U as a stock to sell at this stage.

Golden opportunity

The poor performance of Randgold’s shares so far this year wasn’t helped by a trading update last week. Q1 gold production was down 11% year-on-year and profit for the quarter was 24% lower than in the same period in 2017. However, management maintained its full-year production guidance and I believe the depressed share price represents a good opportunity to buy a slice of one of the world’s highest-quality gold-miners.

At a current share price of 5,740p, Randgold has a market capitalisation of £5.4bn and trades on a forward P/E of 22.7, based on a consensus EPS forecast of $3.42 (253p at current exchange rates). Following a doubling of the dividend last year to $2 from $1, analysts are forecasting another hike to $3 (222p) this year, giving a prospective yield of 3.9%.

The P/E and yield look highly attractive to me for a world-class miner. The company’s balance sheet is also as strong as they come: $739.5m cash and no debt.

Capital Gains

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended S & U. 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.