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Why I’d consider buying this Neil Woodford-backed growth stock over this small-cap star

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When even positive results are met with a collective shrug of the shoulders from investors (followed by a bit of selling), it’s a fairly good indication that a company’s valuation has perhaps got ahead of itself. 

Despite revealing that it had managed to grow market share in every market it was operating in over the six months to the end of March, that’s what seems to be the case with budget hotel operator easyHotel (LSE: EZH) today. After a brief rise, the shares have fallen back over 5% this afternoon.

To be clear, these interim numbers were certainly decent. Revenue soared a little under 52% to £4.76m with owned hotel revenue per available room (RevPAR) up 11.2% and outperforming the general market by 11.7%.

The outlook seems exciting too. Having raised funds in March — giving easyHotel a net cash position of £58.1m at the end of the reporting period — the company now expects to increase its room portfolio by 38% over 2018 through the opening of several owned and franchised hotels.  

Encouraged by today’s numbers and despite fragile UK sentiment, CEO Guy Parsons stated that recent outperformance was likely to continue. He went on to remark that easyHotel would “seize opportunities” in its various markets while balancing the development of owned hotels between the UK and Europe. 

So, why the slide? Well, when you consider that the shares traded on a nosebleed-inducing price-to-earnings (P/E) ratio of 213 before today and the company had already increased over 50% in value since last September, a bit of profit-taking isn’t exactly surprising. 

Of course, a high valuation never stopped Ocado from rewarding many investors. Fans of easyHotel may also point out that 300% earnings per share growth expected in the next financial year should bring the valuation down to a slightly more palatable 53 times earnings. But given that it certainly isn’t the only budget operator out there, that’s still ludicrously expensive in my view. 

Taking into account the risk involved — and the possibility that Brexit could make things tricky going forward — this is one stock I’m content to side-step for now.

Growth…and income!

If offered the choice, I think I’d be far more likely to take a position in online booking platform (and Neil Woodford income favourite) Hostelworld (LSE: HSW).

The company’s most recent set of full-year results were solid, with group net revenue coming in 8% higher than in 2016 and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) hitting a record €26.4m. Since the company continues to see excellent growth in markets such as Asia, I’m tempted to think the latter won’t stand for long. 

But what about the valuation? A P/E of 23 for the current financial year (coupled with a PEG ratio of just over 1) suggests far better value for money than over at easyHotel.

As mentioned above, Hostelworld is also worthy of consideration by those looking to generate income from their portfolios. The recent 15% hike to the final dividend is indicative of a very healthy business and, while the 3.4% forecast yield for 2018 is far from the largest available in the small-cap universe, not every market minnow is growing at such a healthy rate. 

Factor-in a net cash position (€21.3m) and even “uncertain” market conditions, weaker exchange rates and the forthcoming departure of CEO Feargal Mooney aren’t enough to dampen my opinion of the stock.

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Paul Summers 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.