The Sirius Minerals (LSE: SXX) share price is now 20% lower than it was five years ago. Over the last year, it’s fallen by more than 70%.
The firm’s biggest problem is that it could run out of cash in September. Boss Chris Fraser needs to raise $500m from lenders this month. Without this, the firm may lose access to the $2.5bn credit facility it needs to fund the remaining build costs for the Woodsmith Mine.
Mr Fraser made an unsuccessful attempt to raise the cash earlier in August. Another effort is expected in September. But the stakes are high for shareholders. I believe that failure to secure this funding could leave shareholders facing a total wipe-out, even if the mine goes ahead.
I’m not keen on speculative, loss-making businesses like Sirius. The risks of a big loss are too high for me.
I prefer to invest in profitable companies with proven business models. In the remainder of this article I’m going to highlight two small-cap stocks I believe could be profitable long-term buys.
A contrarian buy?
Discount shoe retailer Shoe Zone (LSE: SHOE) has so far managed to deliver stable results despite retail headwinds. But the firm issued a profit warning today.
Management said that “challenging” conditions since May mean that full-year profits are likely to be lower than expected.
Chief executive Nick Davis has put on his walking boots and leaves with immediate effect. He’ll be replaced by the executive chairman, Anthony Smith.
Mr Smith and his brother Charles, who is chief operating officer, will once again occupy the two top executive roles at the firm. Between them, the two men control more than 50% of Shoe Zone shares. So they have a strong incentive to turn the business around.
In fairness, I think they have a good track record. Since its flotation in 2014, Shoe Zone has delivered stable profit margins and an average return on capital employed of 24%. The company has ended each year with net cash and shareholders have received generous dividend payouts.
Although this business appears to be struggling with growth, its value offering still seems relevant to me. Falling rents have cut store costs and I can see this business retaining a place on our high streets.
I rarely back stocks after a profit warning, but I think that Shoe Zone could be worth buying at under 140p.
Are you sitting comfortably?
Sofa and carpet retailer SCS Group (LSE: SCS) is another firm that has so far avoided the wider retail slump. The firm’s most recent trading update confirmed that the group achieved a 4.2% rise in like-for-like sales during the year to 27 July.
Full-year results are expected to be in line with expectations, putting the stock on a price/earnings ratio of nine, with a dividend yield of 7%.
Like Shoe Zone, SCS generates very high returns on capital and lots of surplus cash. Management has wisely kept the balance sheet debt-free.
Of course, sales would be likely to slump in a recession, as consumers cut back on spending.
That’s not happened yet. For now, analysts expect SCS to report a small drop in profit during the 2019/20 financial year and to maintain its dividend.
Although retailers selling big-ticket items are not without risk at the moment, I rate this as one of the better choices in this sector.
