What is going on?

Takeover bid by global giant

In short, the company announced that it has agreed to a takeover bid from industry giant Mars.

From Mars’ perspective, I think that makes perfect sense. Hotel Chocolat is a premium brand with a dedicated following. Mars has global manufacturing and distribution capabilities that could allow it to scale Hotel Chocolat’s sales volumes and revenues.

I also think the Mars bar maker’s buying power, size and experience could help the multinational firm boost profit margins as it grows Hotel Chocolat’s international footprint.

The offer is £3.75 per share. In early trading, the share price sat at around £3.65.

Could the price go even higher?

Sometimes a bid attracts a share price premium even over the announced offer price. Here it is the other way around. The Hotel Chocolat share price pushed up close to the bid price not all the way, let alone over it.

Why?

I think that reflects the fact that there is always a possibility, however small, that a takeover can fall through. For example, there can be regulatory concerns when an industry leader buys smaller competitors.

The fact the share price has not risen above the offer price suggests the City is not expecting rival bidders to emerge. That makes sense to me, as the Mars bid is backed by Hotel Chocolat’s board of directors.

Sweet but with a potentially bitter aftertaste

I said above that the news was sweet for many shareholders. Given the huge jump in the share price today, why only many and not all?

Even after today’s jump, the shares trade only 18% higher than five years ago. So shareholders who bought then would not make a 162% return selling today. They would, at least, be able to sell for a profit. Yesterday, their positions were deeply in the red.

But for some shareholders who bought at different times, a successful bid will effectively force them to sell their shares at a loss. That will be an actual loss, not just a paper one.

For example, the offer price is 30% lower than the share price in the run-up to Christmas 2021.

Why valuation always matters

As I do not own Hotel Chocolat shares, this will not affect me directly.

But it underlines once again a key point that can affect all investors. Buying into what one thinks is a great company but overvalued, expecting it to grow into that valuation over time, can end up losing a lot of money.

A bidder can come along and take over a company at a lower share price than you paid. In practice, there is nothing small private shareholders can do in such a situation.

So, no matter how good a company looks, I always consider its valuation before investing.

The post Why did the Hotel Chocolat share just double – and more? appeared first on The Motley Fool UK.

1. Hotel Chocolat

After its share price dropped by as much as 75% last year, Hotel Chocolat (LSE:HOTC) shares may seem like an odd pick, especially with a recession on the cards. However, I think there are key catalysts that bears have discounted.

The first is consumer behaviour during a recession. It’s interesting to note that chocolate sales have somewhat of an inverse relationship with consumer confidence. This can be attributed to the lipstick effect — the behaviour of indulging in small luxuries when there’s economic uncertainty. This was evident in its latest half-year update which saw UK sales increase by 7%.

Still, the company can’t shy away from its overall revenue dropping by 9% due to a weak international offering, as it’s always underperformed overseas. Even so, the penny stock is adamant on trying again in Japan. Only this time, it’s doing so with much less capital and more experience as it partners with local conglomerate Eat Creator.

More lucratively, the shares are currently trading at decent value with a great balance sheet boasting no debt. Its current valuation isn’t cheap by any means, but if the chocolatier achieves its goal of 20% EBITDA margin by FY25, starting a position now could present huge upside potential. After all, broker Leberium rates the stock a ‘buy’ with a price target of £3.00.

In fact, had I bought the stock when I first recommended it in late November, I would’ve been up by 35%. Thus, I don’t want to miss out this time, and I plan to start a small position soon.

2. Concurrent Technologies

Like many other tech-related companies in 2022, shares in Concurrent Technologies (LSE:CNC) suffered a downturn. Thankfully though, its drop wasn’t as drastic as many, due to its client base (aerospace, defence, and telecoms), which is more insulated from economic downturns.

In its latest trading update, the company mentioned that it expects its revenue for 2022 to beat consensus (£16m) by 10%, with pre-tax profits coming in as expected (£0.1m). And with the semiconductor industry seemingly at a bottom, a rebound could be on the cards, with Concurrent standing to benefit.

The firm ended last year with its highest ever order backlog as order intake rose by more than 25%. As such, the board is expecting to see significant revenue growth in 2023 as it plans to increase its production capacity.

Nonetheless, Concurrent’s investments in components, R&D, and improving its systems to mitigate supply shortages in 2022 saw its free cash flow tumble. As a result, its 3.4% dividend yield isn’t going to be paid out in the near future as the AIM stalwart looks to claw back its capital. But with a flawless balance sheet, it’s certainly got the right foundation to propel its free cash flow back up.

The penny stock isn’t exactly the cheapest based on its current multiples, which is something I’m cautious of. That being said, its long-term growth still entices me to start a small position given its upside potential.

The post Penny stocks: 2 AIM shares to turn my pennies into pounds appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Mind Gym 

What it does: Mind Gym provides courses designed to boost workers’ happiness, productivity and leadership skills. 

By Royston Wild. Trading news coming out of Mind Gym (LSE:MIND) has been quite impressive in recent weeks. Yet the AIM-listed business continues to trade in and around penny stock territory. 

However, I think the small cap could be a great stock for investors to buy in early December. I believe the release of half-year results on Friday 2nd could remind the market of its excellent sales momentum and lift its share price higher. 

Mind Gym provides services that help employees improve their wellness and their productivity.  With mental health coming increasingly under the spotlight, demand in this niche market could be about to boom. 

City analysts think so, too. They reckon Mind Gym — boosted by its acceleration in the digital arena — will record earnings growth of 31% and 129% in the financial years to March 2023 and 2024 respectively. 

Turnover leapt 11% in the six months to September, the company announced a month ago. Despite the worsening economic backdrop, I’m expecting December’s update to paint another sunny picture.  

Royston Wild does not own shares in Mind Gym. 

Calnex Solutions

What it does: Calnex is a technology company that specialises in testing and measurement services for telecommunication networks.

By Edward Sheldon, CFA. Calnex Solutions (LSE:CLX) continues to generate strong growth on the back of the global 5G rollout. For the six months to 30 September, revenue was up 38% to £12.7m. Meanwhile, diluted earnings per share were up 34% to 2.67p.

Looking ahead, I see the potential for further growth. In its recent H1 results, the company said that investment in telecoms infrastructure to deliver next generation connectivity “continues at pace”. It also advised that it had a strong order book moving into H2.

One thing I like about Calnex, aside from the growth potential, is the fact that the company is founder led. Research shows that founder-led businesses often turn out to be good long-term investments. Founder and CEO Tommy Cook also owns a huge amount of company stock, meaning management’s interests are aligned with those of shareholders.  

There are some risks to consider here. Component shortages/supply chain issues are one. Overall, however, I see a lot of appeal in the stock right now.

Edward Sheldon owns shares in Calnex Solutions.

Fisher James & Sons

What it does: Fisher James & Sons is a company focused on providing support and engineering services to the marine industry.

By Gabriel McKeown. It used to be tricky to find high-quality companies with low market capitalisation; however, the recent market turmoil has meant that there are now far more small-cap opportunities for UK investors. A prime example of this is Fisher James & Sons (LSE: FSJ), as the share price has fallen almost 85% from pre-pandemic levels.

Despite this share-price decline, the company’s earnings are forecast to grow considerably, signalling a rebound may be on the horizon. Earnings per share is expected to grow by over 40%, compared to 3% turnover growth, indicating that profit margins should improve. Additionally, free cash generation remains strong and is now above its three-year average level.

The company’s significant debt level has likely caused investors to avoid this opportunity. However, the interest cover ratio of 2.1 indicates that this can be covered comfortably by earnings. This financial stability is certainly encouraging, especially if market conditions begin to weaken.

Gabriel McKeown does not own shares in Fisher James & Sons.

Judges Scientific

What it does: Judges Scientific acquires and improves specialist scientific equipment manufacturing businesses serving a diverse range of industries.

By Zaven Boyrazian. Judges Scientific (LSE:JDG) owns and operates a diverse portfolio of scientific equipment manufacturing businesses acquired over the last two decades. It’s certainly catering to a niche market. Yet, its products are critical to the research process for many industries and scientific institutions.

Over the last five years, annual revenue growth has been a modest 5%. However, with management improving operational efficiency as well as exercising pricing power, operating margins have rapidly expanded from 1.7% in 2017 to 17.5% at the end of 2021. That’s more than double the industry average.

Being a highly acquisitive business does introduce some notable risks. The balance sheet could become compromised if the group executes an expensive buyout that fails to live up to performance expectations. However, given Judges Scientific’s track record of successful acquisitions, I feel this is a risk worth taking.

Zaven Boyrazian does not own shares in Judges Scientific.

Shoe Zone

What it does: Shoe Zone is a low-cost footwear retailer that sells shoes in over 380 stores across the UK and through its website.

By Harshil Patel. Shoe Zone (LSE:SHOE) reported higher sales over the past year. Its low-cost offering is proving to be popular as customers tighten their belts and face rising costs elsewhere.

It’s a founder-led, well-run business that keeps a tight lid on costs. Much of its future growth could come by expanding its larger store format and from online sales. So far, this strategy seems to be working.

Its double-digit profit margin is stable versus last year, but a drop in shipping costs could push it even higher next year.

I also like its growing dividends and share buybacks. Shoe Zone currently offers a dividend yield of 3%. With £14m of cash on its balance sheet, I’m pleased to note that it’s well funded.

As a shoe retailer, there is competition. And growing stores in an uncertain economic climate could be a challenge over the coming years.

That said, overall, I’d say it’s a resilient, and cash-generative business. It’s making excellent progress and I’d buy the stock for my ISA this December.

Harshil Patel does not own shares in Shoe Zone.

Aquis Exchange 

What it does: a financial services firm operating through three divisions: Aquis Exchange, Aquis Stock Exchange, and Aquis Technologies. 

By G A Chester. Founded and led by a veteran stock exchange technology pioneer, Aquis Exchange (LSE: AQX), is an industry innovator and disruptor. 

Its core Aquis Exchange is a pan-European equities trading platform for institutional investors. It offers a ground-breaking subscription-based pricing model, rather than pay-per-trade. The company also owns Aquis Stock Exchange, a challenger to the London Stock Exchange‘s AIM market. Further revenues come from selling market data and licensing exchange software to third parties. 

Aquis has a current market value of £118m. Revenue for 2022 is expected to be close to £20m (+15%), with pre-tax profit at just over £4m (+25%). Thereafter, annual top-line growth is forecast to accelerate to nearer 20%, with pre-tax profit growth up into the mid-to-high 30s. 

I think the market’s being generous offering me the chance to buy Aquis stock at 21 times forecast 2023 pre-tax profit of £5.65m. Nevertheless, there’s a risk the shares could derate if growth were to undershoot the high level anticipated. 

G A Chester does not own shares in Aquis Exchange. 

Premier Miton Group

What it does: Premier Miton Group is a Surrey-based fund management company

By Paul Summers: Many listed fund managers have seen their share prices collapse as clients have become skittish over the global economy. AIM-listed Premier Miton (LSE: PREM) is no exception. Its value has fallen by more than half in 2022. 

Based on analyst projections, the stock can now be mine for 14 times earnings. That’s not exactly cheap. However, it could turn out to be a bargain when market sentiment inevitably shifts and forecasts are revised. Importantly, Premier has the track record to lure investors back, with 88% of its funds in the first or second quartile of their sectors since inception.

Then there’s the income stream. Although dividends can’t be guaranteed, Premier is down to yield 9.5% in this financial year.

I think this might be a great contrarian play. That said, I would consider waiting until after full-year results are announced early in December before potentially buying the stock.

Paul Summers has no position in Premier Miton Group

Frontier IP 

What it does: Frontier IP provides commercialisation and support services to very early-stage companies in exchange for founding equity stakes. 

By James J. McCombie: Frontier IP (LSE: FIPP) was able to claim its first IPO listing of a portfolio company in its 2022 annual report, which generated £6.5m of cash in share sales. A further £3.4m flowed in after it sold more of the same shares. The hope is that cash flows like this could become a regular occurrence as the 24 companies in Frontier’s portfolio continue developing. And there are some exciting companies in there. One is developing a new family of antibiotics, and another turns landfill fodder into high-quality tiles and tabletops.  

Frontier IP expends time and resources for equity stakes in companies that might have little more than an idea. Although the rewards can be great, many might return nothing, and now the lion’s share of operating income is non-cash. The portfolio approach reduces the risk of any one failure wiping out the company, but this is still a high-risk investment.   

James J. McCombie does not own shares in Frontier IP.

Hotel Chocolat

What it does. Hotel Chocolat is a premium British chocolate retailer. It produces and distributes chocolate and other cocoa-related products.

By John Choong. Shares in Hotel Chocolat (LSE: HOTC) have declined by an eye-watering 70% this year. Its recent exit from the US market hasn’t helped investor sentiment either, as management now expects its FY22 to be loss-making and slower growth pencilled in for FY23.

The good news, however, is that the bad news has already been priced in, and Hotel Chocolat stock may have bottomed. But more importantly, the company can capitalise on a catalyst as the UK enters a recession. The ‘lipstick effect’ — where more affluent customers downgrade purchases to more ‘affordable’ items such as chocolate — could present a boost to sales for the firm.

Having said that, I should point out that upside potential for the stock remains limited according to Berenberg, who rates the stock a ‘hold’ with a price target of £1.55. So, in the coming days, I’ll just be dipping my toes in, and may buy more stock when the retailer’s outlook improves.

John Choong has no position in Hotel Chocolat.

The post Best British small-cap stocks to buy for December appeared first on The Motley Fool UK.

1. Hotel Chocolat

Customers tend to purchase more chocolate when consumer confidence declines, which is why Hotel Chocolat (LSE: HOTC) is one of my stocks to buy. Odd as it may seem, this inverted relationship can be attributed to the Lipstick Effect, where small-ticket indulgences have some level of protection during economic turmoil. Sometimes, this can even lead to increased sales volumes as customers trade down to buy more ‘affordable’ treats and gifts.

As such, I believe the British chocolate manufacturer is well positioned to capitalise on the current economic climate. This has been evident in its latest trading update.

Having said that, there are caveats to buying the stock. For one, the brand’s recent exit from the US due to its inability to penetrate the market spooked investors. This was why the stock dropped over 40% in July. Consequently, management expects to make a loss in FY22 and forecasts lower growth in FY23.

Nevertheless, I think these factors are already priced into the current share price. The board remains optimistic about growth beyond FY23 and the chain is planning on growing its customer base while exercising strict capital discipline. With virtually no debt on its balance sheet and cash and equivalents worth approximately £67m, this could be possible if previous trends prove to be true. Berenberg has a ‘hold’ rating on the stock with a price target of £1.55, so I’ll only be dipping my toes in for now, but may buy more if its outlook improves.

2. Reckitt Benckiser

Next on my list is a less speculative stock, Reckitt Benckiser (LSE: RKT). The FTSE 100 firm has underperformed its index this year, but things could turn around soon, according to brokers at Deutsche.

Discretionary spending is expected to decline during a recession. Yet, demand for Reckitt products isn’t likely to wane due to the inelastic nature of its products. This has allowed the group to raise the prices of its products while growing its profit margins to 22.5%. Additionally, Reckitt earns the bulk of its revenue from outside the UK and Europe, allowing it to hedge against slower growth in the area. This is why Deutsche thinks Reckitt is a stock to buy.

Moreover, its baby formula product, Enfamil, is cited as a strong catalyst to provide earnings growth as analysts are expecting the company to capitalise on a period of rising US births. And with Reckitt aggressively gaining market share over leader Abbott, the product could be a huge money-maker.

Nonetheless, it’s worth noting that the conglomerate’s balance sheet isn’t the healthiest. Having quite a high debt-to-equity ratio (107%) isn’t ideal and is something to take note of. But given that its adjusted EBITDA covers its net debt by 2.4 times, I might be willing to take a risk and open a position. After all, Deutsche analysts rate the stock a ‘buy’ with a price target of £67.50.

The post 2 of the best stocks to buy during this recession appeared first on The Motley Fool UK.

Chocolate retailer

As a quick introduction, Hotel Chocolat is a British-based chocolatier and cocoa grower. It has a retail network in the UK and Japan, as well as an online presence. It is the only UK company that grows cocoa on its own farm.

So what’s happening with Hotel Chocolat shares currently? As I write, they’re trading for 142p, while at this time last year, the stock was trading for 380p. This which equates to a 62% decline over a 12-month period.

To buy or not to buy?

I have compiled a list of pros and cons to help me decide if I should buy Hotel Chocolat shares.

FOR: Hotel Chocolat posted full-year results for the 52-week period ended 26 June 2022. I found them to be positive overall. Revenue increased by 37% compared to 2021, and 60% compared to 2019, which was its last full-year period without pandemic-related disruption. Cash generation was up too, as well as operating profit, falling in line with expectations. In my opinion, it has bounced back well from pandemic woes and can now look towards future growth aspirations, which it pointed to in the update as well.

AGAINST: Since the pandemic, it now has to contend with macroeconomic headwinds. These include soaring inflation, the rising cost of materials, and supply chain constraints. Rising costs can put pressure on profit margins, which underpin returns as well as growth initiatives. Supply chain problems may negatively impact operations such as product availability, which could affect sales and performance too.

FOR: One advantage I believe that Hotel Chocolat has over competitors is the fact it grows cocoa on its own farm in St Lucia. I believe this advantage might help ease supply chain issues for Hotel Chocolat, and possibly give it an advantage over competitors. Supply chain problems are hampering many UK shares and their day-to-day operations.

AGAINST: Earlier this month, Hotel Chocolat announced that it would cease operating its US direct-to-consumer arm, but remain open to wholesale opportunities. In its July update, it said that it would look to focus on low-risk and profitable growth opportunities only. Perhaps the US market does not fall into this category. As a potential investor, seeing the company exiting a lucrative, large market like the US is slightly off-putting.

What I’m doing now

If I had some spare cash, I would be willing to buy Hotel Chocolat shares. Hotel Chocolat’s recent results, its advantage with its own cocoa farm, as well as global profile and presence help me make my decision. I believe the current macroeconomic headwinds will ease eventually. Furthermore, I believe it has a healthy enough balance sheet to help it overcome these obstacles.

The post UK shares: should I buy this beaten-down retailer for long-term growth? appeared first on The Motley Fool UK.

Chocolate heaven

The shares in Hotel Chocolat (LSE:HOTC) have fallen 63% in the past year, while in the last month they’re down 54%. At the time of writing, they’re trading at 138p.

Prior to the pandemic, the up-market chocolate company reported consistent growth in pre-tax profit. 

As we can see, the firm posted a pre-tax loss of £7.45m for the year ended June 2020. This was chiefly a result of the closure of shops during the pandemic. It’s now battling more current issues, like wage inflation and potential price rises in raw materials used as ingredients.

However, the business largely has control over its own supply chain, producing its own cocoa from trees it grows in St. Lucia, in the Caribbean. This could give the company a tactical advantage over competitors who may face supply chain issues.

In results released last week, however, the business stated that it was concerned because of rising costs and wage inflation. Despite this, it posted a 37% higher revenue for the year ended June 2022. What’s more, it’s financially stable with a cash balance of £17m. 

Growing software

dotDigital (LSE:DOTD) has similarly seen its share price plunge recently. In the past year, it’s down 69%, while over the last three months it’s fallen 9%. At the moment, the shares are trading at 92.4p.

The marketing software platform released its results for the year ended June in the past week. Revenue was in line with previous guidance, with a final figure of £62.8m. This was higher than the previous year, which was £58.1m.

Furthermore, average revenue per customer was up 17%, year on year, while 94% was recurring revenue. This was an improvement from 2021, when this figure stood at 93%.

The business did, however, highlight the uncertainty within the broader economic environment. There is the risk, for instance, that the firm loses customers who can no longer afford its services.

On the other hand, the company signed a deal in March with online security giant McAfee. This will last for at least two years and could give dotDigital an opportunity to expand its clientele on a global scale.

Overall, these two growth stocks have seen their share prices fall dramatically over the past year. I think there’s a good chance that the market will recover in the long run and that this could be an ideal time for me to pick up the shares at low levels. I will add these two firms to my portfolio soon.

The post Why I’m buying these 2 beaten-down growth stocks before the market recovers appeared first on The Motley Fool UK.

A recent crash

Hotel Chocolat (LSE: HOTC) is a British high-end chocolatier, recognised for its excellent quality. However, on Tuesday, the company announced that it expected a statutory loss for FY22, which led to this UK share plunging nearly 50% in a day. 

Although the company has been performing well, Hotel Chocolat was affected by its subsidiaries in both Japan and the US. In fact, after an internal business review, the company has decided to close its retail stores in the US. This will lead to costs of £3m, including future lease liabilities and landlord deposits. At the same time, the board also acknowledged the potential to have to pay a full impairment charge of £23m, due to a revised assessment of the likelihood of recovering loans made to its ailing Japanese joint venture. 

These factors meant that as well as the company expecting a statutory loss for the year, it predicts lower sales growth and profit margins for FY23 too.

However, there are many positive signs. For example, revenue growth in the latest year totalled £226m, up 37% year-on-year and ahead of market consensus expectations. This was primarily due to growth in the UK market. Further, for the long term, the group also expects “less risk and an even stronger balance sheet with a higher profit percentage growth in FY24 and FY25”.

Therefore, I’m not too worried about the recent crash and believe that the recent dip makes it an excellent time to buy. I may add some Hotel Chocolat shares to my portfolio. 

An internationally focused UK share

Burberry (LSE: BRBY) is a historic British luxury fashion house that gained a new lease of life in recent decades. It has managed to expand internationally, with over a third of its business exposed to the Chinese market. However, recent lockdowns in China have strained Burberry’s business there. 

For example, Q1 sales in Mainland China fell by 35% year-on-year, and in the Asia Pacific region, sales fell by 16% in the period. This meant that, at a constant exchange rate, comparable store sales only increased by 1% year-on-year, far slower growth than the group wished for. 

However, there are still many positive signs. First, the company has just commenced its £400m share buyback, which is expected to be completed by the end of the year. Second, the European part of the business saw sales increase by 47% year-on-year, driven by the rebound in tourism and higher sales to locals. This is a great sign moving forwards. Finally, according to the company, there are signs that Mainland China performance has been improving since stores reopened in June.

Therefore, I think that this UK share should be able to overcome the current struggles and would be an excellent addition to my portfolio. 

The post 2 beaten down UK shares to buy in a heartbeat appeared first on The Motley Fool UK.

Hotel Chocolat share price jumps after results

The first is the British chocolatier Hotel Chocolat (LSE: HOTC), whose share price rallied 11% when it released its full-year results for the period ending 27 June. As a result, its share price rise over the past year jumped by over 40%. And going by the fact that it is still trading below its pre-pandemic levels, I reckon it can continue to rise further, especially if its numbers keep improving. 

The company saw a 70% increase in revenue over last year despite stores being closed or at least disrupted for half the year, supported by online sales. It also swung back into net profit after reporting a big loss last year. I also like that it has ramped up capital investments to increase production capacity, which can hold it in good stead as demand increases further in the future. 

Greggs upgrades outlook

The British bakery chain Greggs also showed an 11% increase in its share price yesterday following the release of its trading update. This amounts to an over 140% rise in the stock over the past year! While its price has subsided in today’s trading, it could continue to rise over time, going by its outlook. 

It now expects full-year results to be ahead of its previous expectations. This follows the 3.5% increase in like-for-like sales in the third quarter of the year from last year, despite staffing challenges as well as supply chain disruptions. It has expanded its products to include vegan foods and drinks and it is also opening more shops. 

Cakebox supported by delivery apps

Cake retailer Cakebox saw an even share price bigger increase than Hotel Chocolat and Greggs of over 12%, when it released its half-year update at the start of the week. For the six months ending 30 September, the company reported a huge 91% increase in revenue from last year. Its sales got a boost from growth in both its own online deliveries and those from third parties like Uber Eats, Just Eat Takeaway, and Deliveroo.  

My concern for UK stocks

My one big concern with all three companies is rising inflation. Greggs has pointed out that food input inflation has increased. Additionally, it also mentions staff shortages and supply chain challenges, which could further fuel price rises. Since all three companies are in the business of food manufacturing and retail, I reckon that they could come up against the same issue. 

What I’d do

However, so far, the popular belief is that this is a short-term phenomenon, that will ease off by the start of 2022. So, I will hold off any concern on the stocks for now. Based on their performance, I think all three are good stocks for me to buy. But Hotel Chocolat looks particularly attractive to me. It is the only one that is still trading below its pre-pandemic levels. It is among the next set of stock purchases I intend to make.

The post 3 UK stocks that could rally in October appeared first on The Motley Fool UK.

Hotel Chocolat

High street and online retailer Hotel Chocolat (LSE: HOTC) should be releasing its delayed set of full-year results on 5 October. Normally, a postponement would be taken negatively by shareholders but HOTC’s share price has held up well. In fact, it’s up almost 9% over the last month.

This isn’t completely irrational. Back in July, HOTC said revenue in its last financial year hit £165m. That’s 24% higher than in FY19 — the year before Covid-19 struck. So trading’s clearly far from terrible. 

On the flip side, I’m conscious that only a relatively small percentage of stock is actively traded (CEO Angus Thirlwell still owns over 25% of the company). Such a small free float does mean it’s share price is theoretically more susceptible to violent moves, both up and down.

This matters considering the valuation. A P/E of 42 looks very expensive and HOTC simply can’t afford to rest on its laurels if recent momentum is to continue. Should it disappoint in any way (perhaps in relation to rising costs), I might actually get the entry price I’ve been looking for. 

Tristel

Another steeply-valued small-cap UK growth stock reporting next month is contamination control product manufacturer Tristel (LSE: TSTL). It reveals full-year figures on 18 October. 

Like Hotel Chocolat, Tristel is a stock I’ve long admired but never pulled the trigger on. It’s a high-quality, financially-sound company operating in a niche area. Let’s not forget that Covid-19 has cemented the need to do everything possible to reduce infection in healthcare settings. This should provide the company with a springboard for further sales growth. 

However, I just can’t get away from that valuation. A P/E of 60’s eye-watering, even if Tristel has hinted that a rise in (non-pandemic-related) hospital admissions towards the end of its financial year has increased demand for its disinfectant products.

Regardless of it doing everything right from here, a more general stock market wobble could really hammer the price as investors dash to cash. That makes for an unattractive risk/reward trade-off, in my view. As a result, Tristel remains stuck on my watchlist, for now.

Totally

Penny stock Totally (LSE: TLY) is a final small-cap UK growth stock I’ll be following next month. A Q3 trading update from the healthcare solutions provider is scheduled for 28 October.

Of the three discussed today, TLY shares have performed the best over the last year, almost doubling in value. Based purely on valuation, Totally also looks a lot more palatable than both HOTC and TSTL. Its shares currently command a forward P/E of 22. The balance sheet looks fairly solid and there’s an experienced management team at the helm.

Naturally, there are things to be wary of. The fact that Totally is only trading around the breakeven level right now is the key drawback for me. This is also a low-margin business. And while recent demand from the NHS has clearly been good, it’s worth questioning what happens when the Covid-19 storm finally passes. 

Another interesting UK growth stock then, but not one I’d feel comfortable buying before next month’s update.

The post 3 UK growth stocks I’m watching in October appeared first on The Motley Fool UK.

Today’s trading update for the year reads pretty well to me. 

Strong sales

Revenue hit £165m over the last 12 months. That’s a jump of 21% from FY20. That said, I think the 24% jump from FY19 is more important, since this was at a time when the word ‘coronavirus’ was uttered only by virologists.

On a shorter timescale, sales have “remained strong” since the company last spoke to the market in May. As one might expect, trade at the firm’s sites in commuter and tourist locations continues to be impacted by travel restrictions. However, it would appear that stores in less prominent locations have “largely offset” this lower footfall. All told, sales in the 10 weeks to 27 June were 34% higher than over the same period in 2019. 

What really impresses me however, is the huge strides HOTC is making with its digital offering. The AIM-listed company now claims to have grown its UK customer database to 3m. That’s a 66% increase since December 2019. Although not every one of those will be actively purchasing chocs, HOTC did say that sales via this medium now represented a “substantially larger proportion” of total revenue.

But what about the outlook? On this front, I remain optimistic. Unsurprisingly, so does HOTC’s management. 

Increased expectations

Based on the recovery in store sales following the first UK lockdown, the company expects a similar trend over the next few months. Although no actual numbers were given, HOTC now believes that underlying pre-tax profit will be higher than previously thought. This helps to explain why the share price is up today. 

The company’s growing presence in overseas markets is another reason to be bullish, in my opinion. Sales in the US and Japan (via its joint-venture partnership) rose 62% and 277% respectively over the last year. Sure, these are still early days. However, it does indicate that the brand is rapidly winning admirers in two of the world’s biggest economies. 

Following a £22m equity raise last year, HOTC also looks to be in decent financial shape to continue investing for growth. New products are hitting the shelves (including Unbelievably Vegan chocolate). The firm’s UK distribution centre has nearly doubled in size too.

Obviously, where the share price goes from here can’t be predicted with any certainty. The fact that scientists are already warning that the pandemic will get worse before it gets better is not something I’d ignore.

However, it does look like HOTC has already done/is doing what it can to mitigate the impact of Covid. Lower rents have already been negotiated at 30% of the UK stores, for example. 

Growth… at a price

Hotel Chocolat’s stock changed hands for a frothy-looking 44 times forecast earnings as markets opened this morning. That said, it also had a price/earnings-to-growth (PEG) ratio of under 1. This suggests the small-cap stock may actually be better value than it initially appears to be.

So long as the rest of my portfolio remains diversified and I don’t mind the potential for greater volatility, I’d be content to buy now.

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