With £2,000, I’d buy this growing mid-cap and sell this small-cap challenger

Small companies don’t always have the brightest growth prospects, and I reckon these two firms demonstrate that.

| More on:

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To my eye, the full-year results report from small-cap bars operator Revolution Bars Group (LSE: RBG) makes grim reading. The firm runs 76 premium bars in the UK, branded Revolution and Revolucion de Cuba, which is fine when the concept clicks with customers and when they are flush with disposable cash to spend. However, fashionable bars can go out of fashion and customers of such concept set-ups often decide to pile into the next trendy bar that opens up down the street instead, without a second thought.

Can the concept endure?

So, I wonder whether Revolution Bars Group has the legs to make a decent long-term investment. Today’s report doesn’t soothe my doubts. Although sales rose 8.7% compared to the equivalent period last year, the increase is down to the opening of six new sites. Like-for-like sales actually declined by 0.6%, which suggests a less vibrant outcome than the headline figure would lead us to believe. In fact, adjusted earnings per share tumbled 11% and the directors put a brave face on things by holding the final dividend flat.

What really worries me is the long list of justifications for the poor performance such as the uncertainty following corporate activity, management change, extremes of weather and the FIFA World Cup.” Ok, the company was subject to a takeover offer that fell through and key management including the CEO quit, but if the customers were packing the bars through the period, I reckon sales and profits would have been more robust, whatever was going on in the back rooms.

I’m wary that fickle customers may already be growing tired of the firm’s concept, so, despite my bullish article earlier in the year, I’ve changed my mind. I can no longer see the point of taking the risk of buying shares in Revolution Bars Group and would much rather go for a proven winner like mid-cap pub operator JD Wetherspoon (LSE: JD).

Piling them in

The Wetherspoon concept has far wider appeal and more or less operates at the other end of the scale from the ‘premium’ approach taken by Revolution Bars. In fact, Wetherspoon bases its business model on selling ‘cheap’, and I think a value proposition like that is far more suitable for a long-term investment horizon because the concept is unlikely to out of fashion.

One of the things I like about the firm’s annual reports is the way the firm lists its annual performance right from the beginning of operations in a similar way that Warren Buffett does with his firm Berkshire Hathaway. It makes interesting reading. In 1984 the firm turned over £818,000 for a pre-tax loss of £7,000, and in 2018 it saw revenue of almost £1.7bn and made a pre-tax profit of more than £107m.

Since the firm came to the stock market, shareholders have been rewarded with multi-bagging gains, and I think there’s more to come in the years ahead. Wetherspoon strikes me as a decent bet for long-term growth and I think the stock is well worth your research time right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold 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.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »