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Why I’m buying this cheap growth stock

This retail stock is one that certainly did not have the best 2018. However, things seem to be looking up and while the company is growing, the stock price is still very cheap. The odds may seem to be against this company, but I have a lot of faith in the changes it is making and I definitely plan on snatching this one up.

McColl’s Retail (LSE: MCLS) is a newsagent and convenience store that stocks everything from your daily food shop to alcohol. The company has had a turbulent recent history with its key supplier, Palmer & Harvey, collapsing in 2018. This collapse left McColl’s stock levels incredibly low which wasn’t the best news for the company.

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Good things on the horizon

However, it seems that it is already bouncing back from the 2018 disaster. The shares are up 70% to 83p in comparison to their low of 50.6p in late 2018. Thankfully, McColl’s worked quickly to pick things back up after Palmer & Harvey collapsed. By August last year, Morrisons was its new wholesale and distribution partner, rectifying any damage that had been done.

This obviously was not enough for the firm to avoid a profits hit in 2018, but 2019 has already seen the company on much firmer footing than before. The Institute of Grocery Distribution forecasts a 3.3% growth rate for convenience stores, which applies to 81% of McColl’s locations. Furthermore, the company is investing in 20-30 store revamps this year, predicting sales growth of 5% in these particular shops.

Coming up with solutions

It hasn’t just stopped there though. The company is also taking a look at its existing products and bringing in much more profitable ranges. There is a gradual long-term decline in news and tobacco that McColl’s is mitigating by introducing a new food-to-go range that should help to bring in new shoppers, as well as appealing to existing customers.

The company is clearly working hard to turn things around and I feel that the steps it is taking all make good commercial sense. With a reliable new supplier and new additions to the in-store offer, footfall should get a boost

Not plain sailing

That is all very well, but this does not mean that growth is going to be easy. The convenience store sector is very competitive and rising costs such as wages and rent will not make it a breeze for the company to bounce back.

Having said this, at such a low price of around 83p at the time of writing with a very healthy dividend yield of 4.6%, the risks appear to be priced in. I’m excited to see what the future holds for the company and I still have faith that McColl’s will continue to grow despite cynical investors.

Capital Gains

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fional has no position in any of the shares mentioned. The Motley Fool UK has recommended McColl's Retail. 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.

EDITOR'S NOTE: The original published version of this article stated "the company is investing in 86 store revamps this year" - this has changed to reflect McColl's guidance of 20-30 refurbishments in the current year. Additionally, the piece initially incorrectly stated that "McColl’s is adding 600 post offices to its stores"; the company currently operates circa this number of in-store Post Office counters/branches.