Tasty profit

First up is fresh-cream-but-egg-free cake maker/retailer Cake Box (LSE: CBOX). Back in June, the company reported revenue and pre-tax profit had climbed 16.9% and 11.8% respectively over the 12 months to the end of March. That’s really something when you consider its stores had to temporarily close during 2020.

Thankfully, online sales took the strain. These rose 84%, supported by the development of its own delivery platform. In addition to this, CBOX has also been introducing new products that cater to vegans and those on gluten-free diets.

Based on its rapidly expanding estate, I think the future looks pretty sweet for the company. Operating a franchise model, it had 157 stores by the end of the financial year. A further nine franchise stores have since been added with the company targeting 18-24 in total over FY22.

Factor in many people wanting to celebrate important events they previously couldn’t and I think it unlikely trading will suddenly reverse. I’m also encouraged by CEO Sukh Chamdal still owning 32% of the company. If I’m to back a small business, I want to know those running it have a significant amount of their own cash at stake.

Hot market

Another stock that could prove to be one of the best shares to buy in the small-cap space right now is Property Franchise Group (LSE: TPFG). Now the largest property franchisor in the UK, the firm also manages the second largest estate agency network and a portfolio of lettings properties in the UK.

In its recent trading update, the company reported like for like revenue and management service fees were “significantly up” over the first half of 2021, compared to the same six months in 2020. While that might be inevitable considering the impact of Covid-19, this result also beat numbers from 2019.

The reason? A white-hot UK housing market has generated huge sales growth. Increasing prices have also allowed the company to collect a larger average fee. Since this shows no signs of slowing down just yet, TPFG now is confident of “a very strong trading performance for the full financial year“. The recent purchase of Hunters estate agents will no doubt help as well.  As such, I think the shares could go higher from here.

Know the risks

Before buying either (or any) small-cap stock, investors need to be aware that their share prices have the potential to be highly volatile. Part of the reason is that minnows tend to have small ‘free floats’. This refers to the proportion of a company’s shares trading on the market. In practice, a small float means it only takes a bit of selling or buying to produce big swings.

There are more specific things to consider. Based on current earnings estimates, CBOX shares change hands for 25 times earnings. That’s not excessive, but nor is it a bargain either. A P/E of 14 makes Property Franchise far cheaper. However, it’s naturally exposed to a slowdown in the property market — although this may be some way off.

As always, it’s vital to keep expectations in check. 

The post 2 of the best small-cap shares to buy now appeared first on The Twelfth Magpie.

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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.

If you’re intent on achieving financial independence earlier than most, however, you may wish to focus on promising small-caps instead. It is, after all, easier for these firms to rapidly grow revenue and profits than it would be for your typical FTSE 100 juggernaut. Today, I’m looking at two market minnows doing just that. 

“Another strong year”

D4t4 Solutions (LSE: D4T4) focuses on helping businesses collect, manage and analyse their data. It’s been around for 34 years now, albeit under the name of IS Solutions before rebranding in 2016. 

Hailing “another strong year of profitable growth,” the company today posted a near-37% rise in total revenue (to £25.2m) for the year to the end of March. It reported “notable sales success” in both the US and Europe, including winning its largest contract to date for its Celebrus software in the latter. At £6.34m, pre-tax profit was near double that achieved in the previous financial year.  

Unsurprisingly, D4t4’s finances continue to strengthen with £11m in net cash at the end of March — a rise of 185% in just one year. Although unlikely to be a priority for holders, the 20% rise in the dividend to 3p underlines just how confident the company is on future trading.

According to CEO Peter Kear, D4t4 “enters the new financial year in robust shape after closing a number of significant contracts in the second half of the year benefitting 2018-19 and subsequent years.” 

Shares were trading on almost 19 times earnings before the market opened, and are now up around 4%. While some profit taking wouldn’t be a surprise, I can see this business getting a lot more attention from investors going forward.

In a sweet spot

Another small-cap company growing at a fair clip is AIM-listed Cake Box (LSE: CBOX). Yesterday’s full-year results from the franchise cake manufacturer and retailer appear to have gone down well with those already invested.

The £67m-cap recorded a 33% rise in revenue to £16.9m in its first year as a listed business. After taking into account the costs of its IPO, adjusted pre-tax profit came in at £4m — a 19% rise.

Cake Box’s estate is also growing. Over the 12 months, it added 27 new franchise stores, giving a total of 113 now in operation. Like-for-like store sales grew 6.5%, while online sales rocketed 58% to £4.4m.

Like D4t4, Cake Box has plenty of cash on its balance sheet (£3.1m). A 50% hike to the final dividend resulted in a total payout for the year of 3.6p, giving a trailing yield of 2.1% at today’s share price.

Like D4t4, the company was also upbeat on its outlook, highlighting how it plans to open two stores a month as part of a growth strategy that has also included the purchase of two new production and distribution centres. According to CEO Sukh Chamdal, “there is still significant scope for expansion” into other regions.

While it’s understandable if some investors are wary following the collapse of Patisserie Valerie, Cake Box looks an interesting proposition. Trading on a little less than 17 times forecast earnings, it’s earned a place on my watchlist. 

The post 2 promising small-cap growth stocks I think could help you achieve financial independence appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

Is this stunning growth story over, or will patient shareholders be rewarded with another leg up at some point soon?

Can BOO beat forecasts again?

Over the last year, analysts’ have increased their earnings estimates for 2018/19 by 11% to 3.98p per share. If correct, that means that Boohoo’s earnings will have risen by 23% over the last year.

By contrast, sales are expected to have risen by about 46% to £843.9m. When sales rise faster than earnings, it usually means that profit margins are falling. That’s something we saw during the first half of the year, when Boohoo’s adjusted operating margin fell from 9.4% to 8.9%.

This isn’t necessarily a major concern, but I think it’s worth watching.

This could be a bigger problem

A more serious worry for shareholders may be that the group’s growth profile is changing.

During the first half of the year, sales at the core Boohoo brand ‘only’ rose by 15%. Most growth came from PrettyLittleThing, where sales climbed 132% to £168.6m. The group’s success with multiple brands suggests that it has a winning formula.

Yet a problem for shareholders is that Boohoo only owns 66% of PrettyLittleThing. The remaining share of this brand is owned directly its founders, Adam and Umar Kamani, whose father is Boohoo co-founder Mahmud Kamani.

This situation has created some bad feeling for Boohoo shareholders, who will not see the full benefit of PrettyLittleThing’s growth. There’s also a potential risk that the Kamanis could create more brands that would further dilute Boohoo sales.

Is the price right?

I think that Boohoo is an impressive business. But the valuation still looks demanding to me. The shares currently trade on a 2018/19 forecast price/earnings ratio of 49, with a 2019/20 P/E of 39.

This translates into price/earnings growth (PEG) ratio of 1.8 for 2019/20, well above the 1.0 level commonly seen as offering good value.

In my view, the good news is already in the price at Boohoo. I don’t see any reason to buy at the moment.

An exciting new growth story?

If you’re looking for upcoming growth stocks with exciting potential, I believe one company worth watching is Cake Box Holdings (LSE: CBOX). This franchised chain of bakeries has grown from one branch in 2008 to 114 today.

Trading as Eggfree Cake Box, the group’s selling point is that its cakes are egg-free. This makes them suitable for those following a lacto-vegetarian diet, which allows dairy but not eggs (or meat).

Sales rose by 44% to £8.28m during the first half of the year. Full-year sales for the 12 months to 31 March are expected to top £17m, according to an update today.

Profit margins are high thanks to the franchise model. Cake Box reported an operating margin of 24% for the first half of the year, suggesting that profits could rise rapidly if the rollout can be maintained.

My only concern is that like-for-like sales only rose by 6.5% last year, compared to 15% the previous year. This may indicate that growth is increasingly dependent on new store openings.

Despite this, the share’s PEG ratio of 0.8 suggests they could be attractively priced at current levels. I think this is one to watch.

The post Boohoo share price: can it keep rising? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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.